This week, Starbucks (Nasdaq: SBUX) celebrated its third anniversary in the Rule Breaker Portfolio. We bought it with the proceeds from the sale of S&P Depositary Receipts, or Spiders (AMEX: SPY). Are we sorry to have made the trade? Not at all. Starbucks has been a welcome member of the portfolio, returning over 57% overall, compared to 11% for the S&P 500 with dividends reinvested.
The anniversary caused me to reflect on our stock sales over the last three years. I'd lost track of many of those companies, like high school buddies I'd left behind for one reason or another. Overwhelmed by nostalgia, I wanted to find out where they are now. Here's what I found.
Excite@Home (Nasdaq: ATHM)
I've kept up with this one a bit. It is the most recent departure from the Rule Breaker Port. We sold it in December 2000 at $5.91. After postponing profitability even further and taking on what was seen as toxic debt from Promethean Capital Group, the stock now sits at about $2 per share.
Under new CEO Patti Hart, the focus has shifted -- again -- away from media and back to cable. The company is divesting its European media operations and is rumored to be unloading Blue Mountain and maybe Excite. Those properties cost the company over $8 billion in cash and stock. Excite@Home's market cap now is $825 million. That's value destruction.
But, hey, it's water under the bridge. No point in agonizing over bad past decisions. As we've learned from our stock sales, sometimes you just have to take your losses and move on as best you can. We put our cash from Excite@Home into Spiders, then into eBay (Nasdaq: EBAY). That exchange has put the assets to better use. Let's hope Excite@Home does the same.
Iomega (NYSE: IOM)
The personal data storage business just isn't what it used to be, what with enormous hard drives and speedy local area networks. Iomega's Zip disks are way out of fashion. It's got a new product that backs up a 15-20 gigabyte hard drive, so it may not be done yet. But with $1.2 billion in trailing sales, Iomega's got an enterprise value of about $220 million. Youch. The market doesn't like the smell of it.
We finally sold this stalwart of the portfolio in December 1999 at $3.81 per share. It's now at $2.18, a 43% drop. We put the money in Celera Genomics (NYSE: CRA), which is down 6%, compared to a 12.2% drop in the S&P.
3dfx wishes that it were Iomega. The onetime leader in graphics cards for PCs got roundly trounced in the marketplace by NVidia Corp. (Nasdaq: NVDA), which added insult to injury by buying the assets of the company.
We sold 3dfx at $9.31 in December of 1999. It's now at $0.37. The proceeds of the sale also went into the Celera buy.
In December 1998, we unloaded three stocks that had all lost money for us. They were:
3Com (Nasdaq: COMS)
We bought 3Com when it was a leader in networking, but its main competition was an outfit called Cisco Systems (Nasdaq: CSCO). As it lost market share to Cisco, 3Com sought to shore itself up by merging with U.S. Robotics, the leading modem producer. Unfortunately, the merger had the opposite effect, dragging down margins. It did supply 3Com with its most valued asset, however: Palm (Nasdaq: PALM).
We sold our 250 shares of 3Com before it spun off Palm as a separate stock, and for a while it looked like we'd really dropped the ball. We would have gotten 370 shares of Palm at its IPO, when it rocketed to unheard-of highs. Unbelievable highs. In fact, 3Com's share of Palm was technically worth more than 3Com itself at one point, a sign that the market recognized its own madness.
3Com has fallen from $43 to $4.75 since we sold it. Palm is now worth $5.75 per share. We sold our stake for $10,742; if we'd held, our position in both companies combined would be worth $3,315. Of course, if we'd timed the sale of our Palm shares right, the proceeds would have totaled $37,000. But we wouldn't have timed it right. Hardly anyone ever does, and we certainly don't.
KLA-Tencor (Nasdaq: KLAC)
This is the one where we did drop the ball. We sold the semiconductor manufacturing facilitator at a split-adjusted $17, and it's now at $57, having posted that gain since January 2001. Heck, though, this is a cyclical industry, and KLA-Tencor leads the cycle.
I'm glad to be out of the stock. We're not fond of technology companies (no, really, we're not), nor do we care for businesses with a limited customer base. KLA-Tencor is a fine company, one of the best ones we've sold completely, but it didn't belong in our portfolio.
Innovex (Nasdaq: INVX)
The Innovex story isn't nearly so interesting. As a maker of flexible circuits for disk drives and semiconductors, Innovex has the same problems as KLA-Tencor -- a tech company with a small customer base.
Like 3Com, Innovex has not kept up with the curve. It has fallen from profits and high margins to big losses. We sold it at $16.19, and it's now at $3.69 per share, a fraction of its book value, which itself has plummeted from $14 per share in 1998 to $4.86 today. We're not sorry it's gone.
We used the proceeds from these three, along with some profits from America Online (NYSE: AOL) and Amazon.com (Nasdaq: AMZN), to buy Amgen (Nasdaq: AMGN) and @Home (the latter was sold to buy eBay). The $75,000 invested then has become $76,500, a gain of about 2.5%, compared to a 7.3% gain in the S&P. We would have lost 35% if we'd held 3Com, KLA-Tencor, and Innovex.
Oh, speaking of Amazon, we sold some of it for fundamental reasons in March. It's up about 13% since then, compared to a 2.3% drop in the S&P. We put the money in eBay, however, and it's up over 50%.
The Rule Breaker is often criticized for not selling early enough. It's a valid criticism -- we probably should have sold all of these stocks sooner, as well as Amazon and Celera and everything else right at their highs. I take some consolation, though, that we generally haven't gotten out of companies too early, bailing on businesses that are improving. We've made mistakes there as everywhere, but the record's pretty good.
Have a great weekend.
Brian Lund has made innumerable errors of commission as well as omission, so he's not casting any stones today. Of the companies mentioned, he owns eBay. You can see all his holdings in his profile. The Motley Fool is investors writing for investors.