<THE RULE BREAKER PORTFOLIO>

Is NITE a Rule Breaker?
Plus, Starbucks invests in Talk City

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (May 6, 1999) -- Another tipsy-turvy day. Up or down, soon we won't be able to tell the difference. Look once: stocks are up! Look again: hey, now they're down. The key is to pull a Harry Jones (more on him later). Just look at prices from one year ago (or three) and then look at where they are now. Don't worry about where stocks were just twenty-four hours ago compared to now. The larger hint as to a stock's direction resides in its distant past: if a stock has risen continually for years or decades...

Well, you round out the conclusion. The averages say that it will continue to rise over time. Eventually. Usually. But not today.

America Online (NYSE: AOL) slipped 7% after yesterday's bounce, while new coverage by investment house Legg Mason couldn't lift Amazon or eBay. Legg Mason rated eBay (Nasdaq: EBAY) a buy. Perhaps indicative of the market funk that we're experiencing, eBay flopped anyway. Typically a buy recommendation from a respected investment house does wonders for recently-public companies. eBay rose initially, but became winded and fell by day's end. Amazon (Nasdaq: AMZN) was rated an outperform by Legg. Today it underperformed, falling 6%.

Even @Home (NYSE: ATHM) couldn't stay healthy. The stock surrendered an $11 mid-day gain to end in the red, even as @Home was called the Internet Service Provider for the new millennium by industry watchers today. Certainly @Home won't be that for the entire millennium, but perhaps for many years. High-speed cable Internet providers are expected to reach nearly 14 million subscribers within three years, up from 700,000 last year.

Stock moves aside, onto some real news.

Talk City (www.talkcity.com), announced that Starbucks (Nasdaq: SBUX) invested $20 million in Talk City's interactive community services business. Howard Schultz, chairman and CEO of Starbucks, said, "Talk City provides the perfect venue for Starbucks online community. We believe there is enormous business potential for Starbucks on the Internet, and are excited to invest in Talk City to begin the journey.''

So, Starbucks has begun to invest in online businesses aside from its own handy website, www.starbucks.com. Is this the new Internet venture that Starbucks recently hinted at, or is this only one arm of the new venture? Today's news was announced by Talk City. We expect a full press release from Starbucks, of course, that will explain in detail the company's full Internet-related strategies. So, today's news might be just one small corner of a large conch shell sticking out of the sand on the Starbucks beach -- a corner exposed by Talk City.

Fools continue to speculate as to what the new billion-dollar Starbucks Internet venture will be. We can safely conclude that the new business will not be JuJuBees.com. Some Fools proposed that it would be a community website, or portal, that would discuss social issues and the arts. That idea is in-line with the Starbucks culture and mission (and with today's investment in Talk City), but that might be the very thing that nullifies the possibility. Starbucks said the new Internet business isn't related to current operations, other than being promotable to existing Starbucks customers.

Another Fool hypothesized (a few days ago) that the new business will be an investment company that slugs money into Internet-based operations. Ta da. Exactly what Starbucks did today. However, CEO Howard Schultz already has a venture capital firm. Would he overlap that with Starbucks? Perhaps. "Invest in what you know."

Whatever the new business is, Starbucks promised to announce specifics by the end of June. Place your bets on the Starbucks message board. The Fool who guesses the new business accurately wins a $25 Starbucks gift certificate. (Today's Talk City news makes this contest considerably easier. If there are multiple winners, the first poster to be correct, as shown by the time stamp, wins. Starbucks employees or partners are not eligible, nor are Fool employees.) The prize is not a worldly sum, but it buys 10 days worth of coffee. Plus, the true reward is endless Foolish praise.

Oh, if today's Talk City news is THE NEWS, nobody wins. Sorry!

Is NITE a Rule Breaker?

Many Fools on the Rule Breaker board argue that Knight/Trimark Group (Nasdaq: NITE) is a Rule Breaker. In fact, Fools have compiled lists of potential Rule Breakers on the message board and we'll study one new company each week in this column. I suspect that most will not be Rule Breakers. It's not an easy test. If a company fails one Rule Breaker step we toss it into endless cyberspace. Of course, such a conclusion doesn't mean that the stock might not be an excellent investment.

So, let's consider Knight. The stock has risen from $23 to $140 this year, hitting as high as $161. Why?

The company is a leading market maker in both Nasdaq securities and the over-the-counter (OTC) or Third Market for New York Stock Exchange and American Stock Exchange securities. Creating a market for stocks and earning a small commission on trades, the company has especially benefited from increased Nasdaq trading. Knight serves national and regional full-service broker-dealers, online brokers, and institutional investors, executing trades by offering to buy or sell securities for its own account. The company was recently featured in the Fool's useful Daily Double column -- consider bookmarking that if you haven't.

Behold: the six Rule Breaker criteria to run this puppy through. It must meet all of these:

  1. The top dog and first-mover in an important, emerging industry.
  2. Sustainable advantage gained through business momentum, patents, visionary leadership, and/or inept competition.
  3. Excellent past share appreciation, measured by a relative strength of 90 or higher.
  4. Good management and smart backing.
  5. The greater the consumer brand, the better.
  6. A significant constituent of the financial media is recently on record for calling it overvalued.

Is Knight...

Top dog and first-mover in an important, emerging industry?

This is more subjective than one might think. Which industries are important? Beyond being important, which industries are financially attractive enough for investors? The airline industry was immensely important as it emerged, and still is, but it isn't profitable enough to interest many investors. What about Knight?

How stocks are traded is changing, with decentralized markets promising to populate the Internet and offer 24-hour trading. However, I don't believe that stock trading is an emerging industry. Nor is it dynamic enough. How can Knight scale its business? Cover more stocks and maybe move into other mediums of exchange? That second option is unlikely. Meanwhile, afterhours trading will be offered by most market makers, so there is little advantage to grab. That leads to criterion number two.

Sustainable advantage gained through business momentum, patents, visionary leadership, and/or inept competition?

Knight does possess sizable investments in equipment and market relationships, resulting in strong business momentum. As for patents, leadership or inept competition, however: aside from good leadership, the other qualities don't seem very present.

Let's skip to number five.

The greater the consumer brand, the better?

Knight doesn't have a consumer brand and sports few worthwhile opportunities to create one. One can argue that Nasdaq has created a consumer brand (it has, as has the NYSE), but market makers haven't. They might try to do so as they begin to offer secondary trading markets online, but it's hard to imagine how any market maker can differentiate itself enough to make its brand matter. Well, actually, there might be one way: build an online site of exchange, as eBay (Nasdaq: EBAY) has for auctions, and become the most trusted brand in online stock exchanges.

That might happen, but isn't happening yet.

Though lacking a consumer brand, NITE does have an inside industry brand. We look for consumer branding, however, for many reasons, one of which is the larger mass market that it represents. Even Amgen (NYSE: AMGN) has a much stronger consumer brand than NITE. Spend time with patients and doctors and you see it at work.

Having failed key criteria -- numbers one and two arguably being the most important -- we needn't continue considering Knight as a Rule Breaker. Some Fools on the Rule Breaker board disagree with this conclusion, including this convincing Foolish post from "retire," but Knight/Trimark isn't a Rule Breaker in my book. (I'm not sure that any company with a slash in its name can be.)

Of course, Knight might continue to be a very Foolish investment -- maybe even better than many we've made here -- but it won't grace this portfolio anytime soon. To find all of the posts on NITE in the Rule Breaker board, do a search of that board for keywords NITE and/or Knight. Also, you can visit the NITE board for more discussion.

Harry Jones

Busy farming, Harry Jones writes to the Fool every Thursday now. His new column was posted today. We now offer a column specifically on index funds, too, to complement Harry's, ah, interesting perspectives. The brief, educational index fund column, written by a Fool writer, runs beneath Harry's column. I wrote today. I'm afraid that my column blanches beside Harry's work, but I can do little about that. Check out Harry Jones every Thursday, and visit the Harry message board, too, for, ah, original discussion.

Warren Buffett

Few names can follow Harry without paling in comparison. Buffett may be one of them. Yi-Hsin Chang (TMFPuck) attended Buffett's Berkshire annual meeting and tonight delivers her final review of the event. Be sure to see the entire special feature from Nebraska and the Fool.

Fool on!

05/06/99 Close

Stock  Change    Bid 
------------------ 
AMGN  -1 1/16    61.38
AMZN  -9 1/8    137.38
AOL   -9 13/16  120.69
ATHM  -1 3/16   153.75
CAT   +  1/4     65.38
CHV   -2 1/4     97.81
DD    +1 3/4     72.69
DJT   +  3/16     5.25
EBAY  -11 5/16  175.50
GT    +1 15/16   64.63
IOM     ---       4.88
SBUX  -2 1/4     35.25
TDFX  -  1/16    17.31

                  Day     Month  Year   History   Annualized 
      R-BREAKER  -5.14% -12.09%  42.75% 1332.81%   75.15%
        S&P:     -1.13%  -0.23%   8.68%  204.15%   26.39%
        NASDAQ:  -2.45%  -2.78%  12.75%  243.29%   29.65%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    120.69   13179.14%
   9/9/97  1320 Amazon.com     6.58    137.38    1988.01%
  5/17/95  1960 Iomega Cor     1.28      4.88     280.74%
  12/4/98   450 @Home Corp    56.08    153.75     174.16%
  2/26/99   300 eBay         100.53    175.50      74.58%
 12/16/98   580 Amgen         42.88     61.38      43.15%
  2/23/99   300 Caterpilla    46.96     65.38      39.20%
  4/30/97 -1170*Trump*         8.47      5.25      38.01%
  2/23/99   290 Goodyear T    48.72     64.63      32.66%
   7/2/98   470 Starbucks     27.95     35.25      26.10%
  2/23/99   180 Chevron       79.17     97.81      23.55%
  2/20/98   260 DuPont        58.84     72.69      23.53%
   1/8/98   425 3Dfx          25.67     17.31     -32.55%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 265512.50  $263513.03
   9/9/97  1320 Amazon.com  8684.60 181335.00  $172650.40
  12/4/98   450 @Home Corp 25236.13  69187.50   $43951.37
  2/26/99   300 eBay       30158.00  52650.00   $22492.00
 12/16/98   580 Amgen      24867.50  35597.50   $10730.00
  5/17/95  1960 Iomega Cor  2509.60   9555.00    $7045.40
  2/23/99   300 Caterpilla 14089.25  19612.50    $5523.25
  2/23/99   290 Goodyear T 14127.38  18741.25    $4613.88
  4/30/97 -1170*Trump*     -9908.50  -6142.50    $3766.00
  2/20/98   260 DuPont     15299.43  18898.75    $3599.32
   7/2/98   470 Starbucks  13138.63  16567.50    $3428.88
  2/23/99   180 Chevron    14250.50  17606.25    $3355.75
   1/8/98   425 3Dfx       10908.63   7357.81   -$3550.81

                              CASH   $9924.87
                             TOTAL $716403.93


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