Fool To Sell COMS, INVX, KLAC, and portions of AOL & AMZN
November 25, 1998
**This trade is being made under the regular portfolio policy, namely, once The Fool announces an intention to trade, that trade will be made within the next WEEK, as opposed to the next day. For more detail, please read the "New Trades" section of the Fool Portfolio.**
The managers of the Rule Breaker portfolio (a.k.a. The Fool Portfolio -- cyberspace's original and best-performing portfolio started in 1994 by David and Tom Gardner with their own real money) announce today that at some point in the next five market days we will sell 3Com, Innovex and KLA-Tencor, and we will also sell minority portions of our two best-performing stocks, America Online and Amazon.com.
Well, we only ever sell stocks for two reasons. The first is when we find some better place to stick our money. That's the sell rule we invoke 90% or more of the time, and conforms directly to the precepts laid out in our "Selling Strategy" chapter of The Motley Fool Investment Guide, wherein it is writ, "When you find a better place to invest your money, put it there."
The second reason we might sell a stock is if and when it gets to be an outrageously large part of one's portfolio.
Both of these reasons feed into the thinking of this sell announcement.
America Online and Amazon.com
The second reason listed above is our lone reason for selling AOL and Amazon. At present, America Online and Amazon.com make up more than 60% of our assets. This has been a great problem to have, because the only way THAT ever happened is because they were superb investments. (We never overweight our portfolio with new purchases, keeping all initial investments at 10% or less of assets. Individual stocks only come to dominate through sheer appreciation.) AOL has risen to become a fifty-bagger for us in the past four years, while Amazon.com has risen eleven times since our initial investment in September of last year. We've been playing with pure profits (having sold off more than our initial investment) in AOL for a year now. With our partial sale of Amazon.com, we will also now be playing purely with profits on our Amazon investment.
Long-time Fool readers will recall a similar selling decision we made in 1997, when we sold off portions of our holdings in America Online and Iomega once they reached a similar imbalance. In fact, this sale is the second in what may be an ongoing tradition of occasional rebalancing we have to do should our portfolio continue to prosper so! We used the money from that sale to short Trump (winner), to buy Innovex (loser), and to buy Amazon.com (winner) -- in retrospect, taking it all in all, a very good move. We'll hope to replicate that success once again.
We must note here, since people across the Internet tend to read our buy and sell reports and sometimes put their own spin on them, that in no way does our partial sale indicate any lack of enthusiasm for the long-term potential of both of these stocks. We will continue to maintain large holdings of them over the long term. This sell announcement demonstrates that we're only trimming these positions down by 20%. At present prices, that means we'll still have roughly half the Rule Breaker portfolio in these two fine companies.
This sale will raise roughly $56,000.
3Com, Innovex & KLA-Tencor
3Com, Innovex, and KLA-Tencor are three good companies with bad stocks. These are among our biggest losers in the portfolio, and in conformity with our first sell reason listed above, we think we can invest this money better elsewhere. Where? Well, in Rule Breakers, in companies that follow some of the new principles (some of them are restatements of the old ones) for growth stock selection being developed and laid out at Fool.com and in our upcoming book. (More about that later.) In Foolish form, we're jettisoning our losers and looking to plow the money back into some stocks that we think will do better going forward.
Not only have these three stocks been market laggards for us, but also due to the nature of their businesses (at least in their present incarnations) we find them the three hardest stocks to follow and understand. In each case, when we bought the stock we felt we had a fairly good understanding of each business and its challenges. But following them has been more difficult than we thought. Whether it's 3Com's difficultly worded press releases (we'll grant them the technology is complicated), Innovex's announcements that come few and far between, or KLA-Tencor's equipment, which we will never have the benefit of using for ourselves, these are basically not consumer businesses.
If you want to generalize about a lesson we take away from all three, it is NOT that they're bad businesses or bad stocks. Rather, it's that networking gear, lead-wire assemblies, and yield monitoring equipment just are not consumer businesses, making it very difficult for average-guy investors like us to figure out WHY things have gone wrong when they do go wrong. The act of selling these stocks and moving it into more consumer-oriented businesses (or at least, simpler businesses to understand and to follow) is a generally good one. And we will of course expect to be investing the money in more profitable prospects, to boot.
It's important to point out, however, that if we didn't need to raise cash for new buys we wouldn't be selling the stocks. Go back to selling reason number one: We only sell when we think we've found something better. We still admire all of these companies -- our tastes aren't that fickle and these firms have continued to execute very well (3Com excluded, at times). We wish them the best and we wouldn't be surprised if they achieved great success -- we'd be happy and perhaps even vindicated! There is plenty of reason to expect them to succeed. Let's take a last brief look at each:
3Com (Nasdaq: COMS)
We bought shares of the networking leader in August of 1995. The shares doubled, then tumbled and have been underwater for us since. Cisco Systems has become the pull-away leader in large networking products, but 3Com holds an important segment of the connection side of the market. Its merger with US Robotics slowed it for a year, but as of its last quarter 3Com began to show margin improvement and stronger earnings again. In fact, the stock made a new 52-week high this week. If we didn't need cash for what we hope to be a better idea, we wouldn't be selling now. But I guess we've made that point by now. Anyway, we aim for constant improvement as investors over time, and we hope that as we do so, we find better investments, causing us to roll out of old investments and into the new and improved ones. Either way, though, 3Com is a world-class company. Just not one we've found terribly interesting or easy to follow -- or made any money on!
KLA-Tencor (Nasdaq: KLAC)
KLA-Tencor is world-class, as well. We bought the company when it was still KLA Instruments in August of 1995. We bought during the surge in semiconductor stocks. The computer revolution had pushed the sector to new highs and the hope was that cyclical downturns were a thing of the past. That didn't prove true, however. Cheap overseas competition and on-again, off-again demand (demand that we can't really monitor effectively as Joe Investors) continue to plague the industry. Unlike most of its competitors, KLA has been able to remain profitable throughout the last three years, and it was able to join forces with leader Tencor Instruments to form an industry-dominating giant.
Due to the nature of the industry, however, we think there are better places for our money. KLA has recently risen from $20 to nearly $40. Book value is around $14 per share, and semiconductor stocks tend to gravitate towards two times book over the long run, in part because earnings are less predictable. Another boom could occur, sure -- and this stock has a tendency to boom big-time when sentiment on the Street grows positive about its sector. Or, the stock could continue performing as it has the past three years, which is more likely. Earnings growth projections are modest. Still, management is doing a great job continuing to make money. If you're investing in this industry (which we won't be anymore) this is one great company -- one great company that we lost money on.
Innovex (Nasdaq: INVX)
Innovex has some similar aspects of greatness: great management. This disk-drive-related company is one of the few making money in hard industry times. We bought Innovex in the summer of 1997 during the disk drive downturn; though, the industry wasn't done "turnin' down" apparently! The stock first rose 35%, but then earning revisions began to pour in as the industry continued to slow and Innovex declined over 45% from our buy price. Like KLA-Tencor, this company is one of the few in its industry that has made money the past 16 months, but it's still a victim rewarded with a low multiple to earnings.
Lately, competition is taking market share. Innovex is addressing the situation with new technology due to ramp next year, and it's also branching into significant other businesses, including chip packaging. (See our recent interview with the CFO.) The company could be positioned for strong growth again (it has whooped the market this decade), and it has excellent management to see it through. This high-margin company is probably, again, the one to own if you're investing in this area of the economy. We simply feel that we will find someplace better -- better and easier to track and understand -- and presumably, one on which we do not lose money.
So OK, combined these sales will raise $20,000. Let it be noted that Fooldom will remain full of interest in these stocks, each of which has an active message board at http://boards.fool.com.
What We're Doing Next
With the $75,000 we're raising, we will be investing this money in Rule Breakers. New Fools who are unfamiliar with the concept of Rule Breakers that we've introduced into our portfolio can find the growing list of their principles here. Of particular interest is the most recent principle (number four), which provides a short list of the attributes of these Rule-Breaking stocks that we prize adding to our portfolio. The exploration and illustration of those attributes constitute the first half of The Motley Fool's Rule Breakers, Rule Makers, due out from Simon & Schuster in January.
(In fact, readers who digest the principles and would like to help us as we locate the next great Rule Breaker are invited to e-mail us their thoughts.)
Our present plans (subject to change -- we're just letting you know what we're expecting to do right now) are to add three new stocks and two new shorts to our portfolio by the end of the year. It is for these investments that we are raising cash now through the partial sales of America Online and Amazon.com, and complete sales of 3Com, Innovex, and KLA-Tencor. We plan right now to announce purchase of our first new investment sometime next week.
Foolish best wishes in investing and in Life!