<THE RULE BREAKER PORTFOLIO>

Buy at the IPO?
Plus, eBay logs onto AOL

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (March 25, 1999) -- August 5, 1994. David and Tom Gardner launch this portfolio with $50,000 cash. They buy America Online; Foolish Four holdings Allstate, American Express, Merck, and Sears; and they sell short Bed, Bath & Beyond and Paychex.

March 25, 1999, approximately 1,600 days later. The portfolio earns exactly $50,000 in one day -- the entire starting capital -- en route to a total value of $712,698, up 1,325% since inception. We live in great times for Foolish investors (horrible times for traders who have effectively danced in and out of the bull market, missing the bulk of the Big Event), and we live in even better times for Rule Breaking investors.

The Internet breaks more rules at once than any other new industry in history. More than the steam engine, the gas engine, the airplane, or the television. Doing so, the new medium has ushered in a storm of Rule Breaking companies, and many more are on the horizon. Today we share a list of upcoming initial public offerings (IPOs) related to the Web.

First: the big news.

A business deal between eBay (Nasdaq: EBAY) and America Online (NYSE: AOL) helped both stocks rise. (Funny: soon after we bought Amazon that company signed deals with AOL, too.) eBay and AOL inked a four year, $75 million agreement that places eBay as the leading auction site on AOL, above uBid, OnSale, and Bid.com, which are also listed on AOL. eBay will have its name on AOL proper, CompuServe, Netscape's Netcenter, AOL.COM, ICQ (which has over 20 million registered users), and Digital City.

In return for eBay's prominent listing, AOL receives sweet cash, real estate on eBay, and it pockets the ad revenue generated by eBay impressions. When it comes to paying AOL $75 million, eBay has a few hundred million in the bank, but in unrelated news, it's going to the market for a boatload of cash. Today the company filed to raise $1 billion through a stock sale. eBay will offer 6.5 million shares to the public market, approximately one-third of them coming from share-saturated eBay executives. The company currently has 121 million shares outstanding.

eBay estimates that it'll raise $600 million in the sale following expenses. (OK, for how much longer will these giant investment banker fees exist? Already Hambrecht & Quist's former CEO, in a new venture, wants to remove the hefty commissions by offering stock directly to the public through the Internet.) eBay will use the money as working capital and possibly for acquisitions, though it isn't in serious acquisition talks now, management admits.

The final bit of news:

@Home (Nasdaq: ATHM) announced its 20th cable affiliate relationship today, joining forces with Prime Cable (creative name, that one). Prime Cable will help our company address key markets in Illinois, Maryland, and Virginia. @Home has been given exclusive access to 1 million homes that are already passed (have cable) and ready for business. Adding Prime Cable's reach, @Home has access to over 60 million homes passed by cable. (It's estimated that @Home will have 1 million subscribers by year-end, up from 331,000 last year.)

Now, the IPOs. They've been blinking onto the market like many fireflies flashing over a rolling meadow on a summer evening. One IPO here, another there; there's another IPO! -- and another! Many will flash quickly and never light again, instead falling to the ground to be stepped on. A few will be at their very dimmest on their IPO day (even if they do very well) and will grow in lustre in the months and years to follow.

Just this week we saw IPOs from Autoweb.com (Nasdaq: AWEB), an online car business, MiningCo.com (Nasdaq: MINE), an Internet navigation service (MINE rose 24% today), and OneMain.com (Nasdaq: ONEM), an Internet access company that debuted today. There are several other Internet companies in the IPO pipeline. The following is a list of more prominent issues planned for the near future.

Auto-by-tel.com (Nasdaq: ABTL)
Business: Cars by Web
Underwriter: BT Alex. Brown
IPO Date: Tomorrow?

Valley Media (Nasdaq: VMIX)
Wholesale music (sells to AMZN, CDNW)
J.P. Morgan
Tomorrow

NetSolve, Inc. (Nasdaq: NTSL)
Network management, security
Robertson Stephens
Next week?

priceline.com Inc. (Nasdaq: PCLN)
e-commerce site where consumers set prices
Morgan Stanley DW
Next week?

eToys
Seller of toys
Goldman Sachs
TBA

Flycast
Web advertising solutions
BT Alex. Brown
TBA

iXL
Website builder
Merrill Lynch
TBA

Launch Media
CD-Rom magazine on Web
Hambrecht & Quist
TBA

MapQuest.com
Online maps
Robertson Stephens
TBA

Marimba
Enterprise software
Morgan Stanley
TBA

Mpath
Online game innovater; also moving into voice chat
Robertson Stephens
TBA

NetObjects
Maker of Web tools
BT Alex. Brown
TBA

Net Perceptions
Collaborative filtering
Robertson Stephens
TBA

TheStreet.com
Online stock market news
Goldman Sachs
TBA

ZDNet
Ziff-Davis Web news spin-off
Goldman Sachs
TBA

MP3.Com
Online music producer
No IPO plans yet, but one to watch for

The dates are not certain because they tend to change right up until the actual IPO date. We'll keep an eye on all of these (and on other potential Rule Breaking IPOs) beginning next week when some more of these companies go public.

The big question is: Do Rule Breaking Fools buy any of these companies at the IPO? Many companies such as iVillage (Nasdaq: IVIL) and TheGlobe.com (Nasdaq: TGLO) recently had screaming IPOs, with stocks opening above $75 per share, hitting up to $100 per share, but then declining to much lower prices in a matter of days. Buying IPOs can be risky. Very few of them take off and never look back. Even fewer become another AOL, Yahoo, Amazon or -- dare we say so soon -- eBay. Very few. Plus, with so many Internet companies coming public, you must realize that many of them are trashy, third-tier companies that will be laggards and will disappear in time. Right now, any IPO with an "e" or ".com" on it soars regardless of merit. (Will eMattress soar when it goes public? Egad. Maybe.)

A healthy skepticism in place, buying the right IPO is a Rule Breaking move that can bring a handsome reward to long-term holders. Page 134 of Rule Breakers, Rule Makers exclaims in bold letters: Buy at the IPO. When you've found a Rule Breaking company and it's going public, if you believe in its long-term potential, considering buying at the IPO.

That is very unconventional advice. Usually we hear, "Beware the IPO! Steer clear! They're risky!" Upon reflection, that black-and-white advice is well meaning but idiotic. Every public company must issue an IPO at one point -- Coca-Cola, Merck, Johnson & Johnson, Cisco Systems, they all did -- so if you simply ignore all IPOs, you're missing great opportunities. Typically the sooner you buy a winning company, the better. $10,000 invested in AOL on Day One in 1992 is worth over $2 million today. If you had a chance to buy dozens to hundreds of other companies at the IPO (Yahoo, Amazon, Microsoft, Pfizer), you'd not balk in retrospect. Instead, you'd buy as much as you could. (A few brokerage firms issued buy ratings on several Internet stocks today, including ATHM, AOL, AMZN, YHOO -- better late than never.) The key with IPOs, of course, is to find companies worth buying.

In the list above, at least priceline, eToys, Marimba, ZDnet, and MP3.Com promise to have strong initial public offerings. (Before it's even public, some are calling for Amazon to acquire eToys.) They could have strong IPOs because they appear to have strong businesses. Are they strong enough to merit an investment at the IPO? Do these companies fit the Rule Breaker mold? They must have these qualities:

  • Top dog and first-mover in an important, emerging industry.
  • Sustainable advantage gained through business momentum, patents, visionary leadership, and/or inept competition.
  • Good management and smart backing...
  • The greater the consumer brand, the better...
  • A significant constituent of the financial media is recently on record calling it overvalued (this happens even to IPOs, as they're issued).

The companies must possess more, too -- you must believe in them and understand them. We'll have more on these IPOs soon. For now, to learn about IPOs in general, read the Fool's "ABCs of IPOs."

To discuss these IPOs and others, visit the Rule Breaker message board and/or the Fool's IPO message board, where many of the companies on the list are being addressed.

Finally, check out the Fool jester hat for sale on eBay. One day remains to bid. All proceeds go to charity.

Foolish investors around the world... Fool on!

What's up with Harry Jones today?

03/25/99 Close

Stock  Change    Bid 
---------------- 
AMZN  +16 3/16 139.88
AMGN  +1 1/2   75.25
AOL   +8 5/16 126.19
ATHM  +10 1/4 146.25
DJT   +  1/16   4.06
CHV   +1 7/16  86.94
CAT   +1 1/2   47.44
DD    +  1/16  56.06
GT    +  1/2   51.88
IOM     ---     5.00
SBUX  +  1/16  29.13
TDFX  +  3/16   11.81
EBAY  +14     159.38

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  +7.58%  25.03%  42.01% 1325.40%  77.40%
        S&P:     +1.69%   4.17%   5.26%  194.97%   26.28%
        NASDAQ:  +2.94%   6.42%  11.04%  238.08%   30.06%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    126.19   13784.30%
   9/9/97  1320 Amazon.com     6.58    139.88    2026.00%
  5/17/95  1960 Iomega Cor     1.28      5.00     290.50%
  12/4/98   450 @Home Corp    56.08    146.25     160.79%
 12/16/98   580 Amgen         42.88     75.25      75.51%
  2/26/99   300 eBay         100.53    159.38      58.54%
  4/30/97 -1170*Trump*         8.47      4.06      52.03%
  2/23/99   180 Chevron       79.17     86.94       9.81%
  2/23/99   290 Goodyear T    48.72     51.88       6.49%
   7/2/98   470 Starbucks     27.95     29.13       4.19%
  2/23/99   300 Caterpilla    46.96     47.44       1.01%
  2/20/98   260 DuPont        58.84     56.06      -4.73%
   1/8/98   425 3Dfx          25.67     11.81     -53.98%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 277612.50  $275613.03
   9/9/97  1320 Amazon.com  8684.60 184635.00  $175950.40
  12/4/98   450 @Home Corp 25236.13  65812.50   $40576.37
 12/16/98   580 Amgen      24867.50  43645.00   $18777.50
  2/26/99   300 eBay       30158.00  47812.50   $17654.50
  5/17/95  1960 Iomega Cor  2509.60   9800.00    $7290.40
  4/30/97 -1170*Trump*     -9908.50  -4753.13    $5155.38
  2/23/99   180 Chevron    14250.50  15648.75    $1398.25
  2/23/99   290 Goodyear T 14127.38  15043.75     $916.38
   7/2/98   470 Starbucks  13138.63  13688.75     $550.13
  2/23/99   300 Caterpilla 14089.25  14231.25     $142.00
  2/20/98   260 DuPont     15299.43  14576.25    -$723.18
   1/8/98   425 3Dfx       10908.63   5020.31   -$5888.31

                              CASH   $9924.87
                             TOTAL $712698.31

Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends in the yearly, historic and annualized returns). For a history of all transactions, please click here.

</THE RULE BREAKER PORTFOLIO>

Are you a Foolish investor?
The Motley Fool Recommends... Check Out These Other Fool Products...

Subscriptions
Primers
Reports
Investing Tools
Books
Fool Gear

Rule Breaker Portfolio Reports
The nightly scoop on the Rule Breaker Portfolio, delivered straight to your e-mailbox. Get more info or order.
Industry Snapshot
New format! A stock idea, industry overview, top players, and financials -- every two weeks! Get more info or order.
Foolish Eight Stock Screen
Here at Last! Foolish Eight Stock Screen. Get more info or order.
Shop FoolMart!

Read More Rule Breaker Reports
 
Spacer