Unlucky Friday
AOL adds members

by Paul Larson (TMFParlay@aol.com)

CHICAGO, IL (Nov. 13, 1998) -- Friday the 13th is supposed to be an unlucky day, and it did not disappoint for the Fool Portfolio as its value dropped 0.59%. The broader market was a bit luckier as the Nasdaq declined a mere 0.17%. The S&P, on the other hand, must have found a four-leaf clover as it actually rose 0.68% on the day. Let's quickly spy the numbers for the relatively quiet week:

Weekly Move:
Nasdaq            -0.46%
S&P 500           -1.34%
Fool              -1.47% 

Best performing stocks:
3Dfx              +9.3%
Amazon            +2.6%

Worst performing stocks:
Innovex          -16.8%
Iomega           -15.1%

I received an interesting piece of email last weekend in response to what I wrote last Friday concerning this portfolio's asset allocation and concentration risk that I wanted to share. Here's what it said:

"One thing that goes overlooked when people criticize asset allocation in the Fool Port, is that no new money has been added to the portfolio since its inception. Because of this, the winners take on excessive percentages of the Port. If new money was continuously added, and invested in other stocks, it would lower the relative weighting of the winners, and allow for balancing of the portfolio. The criticism, thus, is somewhat unwarranted, because the Fool Port is artificially limited somewhat in portfolio management by its own nature."

Hmmm, hadn't thought of looking at the situation from that perspective, but the email does make a whole lot of sense. Chances are that if new money were being added to the Fool Port today that it would not be funneled towards America Online (NYSE: AOL) and Amazon (Nasdaq: AMZN) but would probably be put towards the likes of Starbucks (Nasdaq: SBUX), 3Dfx (Nasdaq: TDFX), or maybe even a company not currently in the portfolio's ranks.

While the Boring Portfolio is like this portfolio in that it has not added money to its initial investment, two other ports in the Hall of Portfolios are a bit more like the average individual's portfolio in that small increments of cash are added over time. The Cash-King portfolio was started with $20,000 back in late January of this year and adds $2,000 in cash every six months. On the other hand, the Drip Portfolio started with a mere $500 and adds $100 to its equity every month. Should we periodically throw some extra cash the way of the Rule Breakers in order to buffer some of the concentration in the winners? I'm sure it's a topic we'll discuss further in the coming months, both on the message boards and otherwise.

Speaking of the Drip portfolio, there have been numerous eyes on the oil stocks of late. The guys over in Dripville are going to spend the next couple weeks (if not months) picking over the oil industry in order to find the next stock to fit the portfolio. Interesting timing as tensions in Iraq have made the oil stocks, such as portfolio member Exxon (NYSE: XON), wiggle a bit more than they normally do. Increased oil prices are good news for those who own oil stocks and don't drive, but bad news for those of us who buzz around town in gas-guzzling V-8's. Not that this portfolio cares much about the fundamental outlook with Exxon since it is in this portfolio as part of the no-brainer Foolish Four strategy. Before I forget, let me mention that we now have a new booklet on the topic available for purchase over at foolmart.com. To be sure, it's an excellent piece of work to have at your fingertips.

Marking the end of earnings season, Starbucks announced earnings after the close of trading yesterday in which the world's leading retailer of coffee posted profits of $0.28 per share in the most recent quarter, in line with estimates. The announcement also contained the annual numbers in which the company earned $0.89 (excluding special charges) versus $0.66 to chime in that the growth is proceeding up to our expectations. You can click here to head over to www.quote.fool.com for the full earnings release. Analysts are looking for the company to earn $1.22 in the year ahead, putting the stock trading at roughly 35-times forward profits after today's fall to $42 15/16.

America Online was also in the news yesterday after the company announced that it has surpassed the 14 million-member threshold, which is extremely exciting news for those of us weighing the company using a membership-based valuation metric. Add in the roughly 2 million members AOL has under its CompuServe wing and the company has over 16 million total members. Considering today's close of $139 3/4 with 229.1 million shares outstanding, this puts the company trading at roughly $2000 per member. Compensate for the company's financial position by tacking on the company's tangible debt and subtracting cash on hand and Wall Street is currently valuing each current member at roughly $1950. Keep in mind that this is current members, and that the company has been on a roll in adding to its customer list.

What's an average member worth? How many members will the company have by the end of next year? Multiply your two responses together and divide by 230 million and you have a quick, dirty, yet rather effective estimate of what you think AOL should be trading at. Keep in mind that each AOL subscriber brings more to the company than merely $20 or so a month in membership fees. It's all about leverage, advertising and online commerce, too.

I quickly polled Jeff on this topic and he guesses the company will have 19 million total members by the end of 1999. He also thinks that about $2,200 per subscriber is a fair value (including both subscriber fees and commerce and ad fees that members generate), putting his thumbnail estimate of AOL's value above $180 by the end of next year using this Q&D model. Personally, I think 19 million members at $2,000 a pop is fair, or roughly $165 a share. Remember that these are just two Fools throwing numbers around here and seeing where they fall. Don't just take our word for it. Use your own numbers, come up with your own models, and figure out what YOU think AOL will be worth down the road. I should also note, as Jeff reminded, that his other models shared in this column come up with fair value next year in the $150 range and $185 to $200 or so in 2000.

One more thing, the Innovex (Nasdaq: INVX) fourth quarter conference call is transcribed and ready to read, at your leisure.

See you on the boards!

-- Paul Larson

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11/13/98 Close

Stock Change Bid ---------------- AMZN +4 3/8 131.00 AOL +3 5/8 140.75 T -1 1/8 61.56 DJT --- 5.69 DD + 5/16 59.25 XON +2 11/16 72.81 INVX + 11/16 14.94 IP - 7/8 43.56 IOM - 5/16 6.75 KLAC +1 1/4 37.94 LU -2 5/8 85.81 SBUX - 1/4 45.06 COMS +1 11/16 35.00 TDFX - 1/2 14.81
Day Month Year History Annualized FOOL -0.59% 5.25% 68.37% 465.05% 49.96% S&P: +0.68% 2.46% 16.00% 145.58% 23.39% NASDAQ: -0.17% 4.32% 17.68% 156.60% 24.67% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 140.00 3749.92% 9/9/97 580 Amazon.com 19.11 127.75 568.47% 5/17/95 1960 Iomega Cor 1.28 7.38 475.99% 10/1/96 84 LucentTech 23.81 83.63 251.25% 8/12/96 130 AT&T 39.58 61.13 54.44% 4/30/97 -1170*Trump* 8.47 5.63 33.58% 2/20/98 200 Exxon 64.09 72.88 13.71% 2/20/98 215 DuPont 59.83 60.69 1.43% 2/20/98 270 Int'l Pape 47.69 44.88 -5.91% 8/24/95 130 KLA-Tencor 44.71 37.00 -17.25% 7/2/98 235 Starbucks 55.91 42.94 -23.20% 8/13/96 250 3Com Corp. 46.86 34.56 -26.25% 1/8/98 425 3Dfx 25.67 14.75 -42.53% 6/26/97 325 Innovex 27.71 14.25 -48.57% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 99400.00 $96818.13 9/9/97 580 Amazon.com 11084.24 74095.00 $63010.76 5/17/95 1960 Iomega Cor 2509.60 14455.00 $11945.40 10/1/96 84 LucentTech 1999.88 7024.50 $5024.62 4/30/97 -1170*Trump* -9908.50 -6581.25 $3327.25 8/12/96 130 AT&T 5145.11 7946.25 $2801.14 2/20/98 200 Exxon 12818.00 14575.00 $1757.00 2/20/98 215 DuPont 12864.25 13047.81 $183.56 2/20/98 270 Int'l Pape 12876.75 12116.25 -$760.50 8/24/95 130 KLA-Tencor 5812.49 4810.00 -$1002.49 7/2/98 235 Starbucks 13138.63 10090.31 -$3048.31 8/13/96 250 3Com Corp. 11715.99 8640.63 -$3075.37 6/26/97 325 Innovex 9005.62 4631.25 -$4374.37 1/8/98 425 3Dfx 10908.63 6268.75 -$4639.88 CASH $12005.75 TOTAL $282525.25


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