<THE RULE MAKER PORTFOLIO>
Coca-Cola the Dog?
By Rob Landley
AUSTIN, TX (March 17, 1999) -- It's been an extraordinary year for the Rule Maker Portfolio. Since the portfolio's inception, six of our ten Rule-Maker selections have increased in price faster than the S&P 500 index, and only one company's stock was trading for less than what we paid as of the close of trading yesterday. Our investments have done quite well.
Of course, we hope every year is an extraordinary year because we've done our best to pick extraordinary companies. To be sure, any one year's stock performance says as much about the psychology of other investors as it does about the real performance of a company's business.
In that light, I'd like to praise the dog of our portfolio. The market price of The Coca-Cola Company's (NYSE: KO) shares closed yesterday down half a percent from where we bought them over a year ago. This means you can still buy Coke stock at the price we paid. For long-term investors, this is a good deal.
The common lament among new investors is: "I should have invested in (whatever) long ago. Look at the run-up it's had since then. I've missed the boat." But what about a company like Coke? Last year, the company paid out a billion dollars worth of dividends to shareholders, bought back over a billion dollars worth of stock, and bought another billion dollars worth of cheap bottling assets in the wake of the Asian economic crisis, all funded primarily from operations. In response, the new investor cries, "Why would I want to buy that? It went down!"
Neither response is particularly useful to an investor. Price alone should NEVER determine what stock a Fool buys, although it certainly can be a contributing factor to the decision WHEN to buy. In the immortal words of former Fool Randy Befumo, "Cheap crap is still crap." That's why, here in the Rule Maker, we believe that quality is fully 100 times as important as valuation (also known as our QuaVa principle.) A bargain on trash is no bargain at all, but a bargain on real value is a rare treat.
In the case of Coke, it has a long way to go to reach "bargain" levels. The perpetual complaint of would-be Coke investors is that the price on the shares is just too high, and all Coke has done in the past year is start to "catch up to itself," whatever that means. Historically, Coke's stock price hasn't dropped much. Instead, it merely hovers at the same level until the growth and share buybacks bring the much-maligned Price-to-Earnings (P/E) ratio back down to earth. (P/E is a concept dreadfully out of fashion in a sustained bull market such as this. But don't worry, it'll be back for the next bear market. And when it happens, the Wise will tell us we should have been focusing on it all along.)
The real story behind Coke is that its earnings last year were about the same as the year before. This is actually an accomplishment considering Coke sells around the world and half the planet's economy collapsed recently (the aforementioned Asian Economic Crisis Thingie). But flat earnings look really bad on paper compared to the huge revenue and earnings increases other companies have been raking in. Many people have decided that after a hundred years of steady growth, Coca-Cola has suddenly stopped growing. Permanently. Sigh...
Meanwhile, Coke has used the Asian fire sale to expand rapidly and cheaply on the other side of the globe. The company is buying bottling assets by the fistful and selling more Coca-Cola than ever before, as measured in gallons. Measured in dollars, the results don't look as good, but if you believe that Asia's economy will recover someday, the investments Coke is making in Asia should pay off handsomely. As should our investment in Coke.
Do you have other opinions on Coca-Cola's outlook? Bring your thoughts and ideas to the Strategy message board.
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03/17/99
Close
Stock Change Bid AXP -2 5/8 120.94 CHV + 1/4 85.63 CSCO + 1/16 106.06 KO -1 7/8 66.81 GPS - 9/16 67.81 EK + 7/16 68.13 XON +1 1/4 74.38 GM - 3/16 88.94 INTC + 1/4 120.50 MSFT -1 15/16 167.13 PFE -1 3/4 140.25 SGP -1 9/16 57.31 TROW - 31/32 37.38 YHOO -2 3/4 172.13 |
Day Month Year History
R-MAKER -0.98% 7.97% 12.55% 42.41%
S&P: -0.65% 4.80% 5.90% 31.03%
NASDAQ: -0.42% 6.16% 10.78% 46.95%
Rule Maker Stocks
Rec'd # Security In At Now Change
2/3/98 24 Microsoft 78.27 167.13 113.53%
5/1/98 55 Gap Inc. 34.37 67.81 97.30%
6/23/98 34 Cisco Syst 58.41 106.06 81.58%
2/3/98 22 Pfizer 82.30 140.25 70.42%
2/13/98 22 Intel 84.67 120.50 42.31%
2/17/99 16 Yahoo Inc. 126.31 172.13 36.27%
8/21/98 44 Schering-P 47.99 57.31 19.42%
5/26/98 18 AmExpress 104.07 120.94 16.21%
2/6/98 56 T. Rowe Pr 33.67 37.38 10.99%
2/27/98 27 Coca-Cola 69.11 66.81 -3.32%
Foolish Four Stocks
Rec'd # Security In At Value Change
3/12/98 17 General Mo 72.41 88.94 22.83%
3/12/98 20 Exxon 64.34 74.38 15.61%
3/12/98 20 Eastman Ko 63.15 68.13 7.88%
3/12/98 15 Chevron 83.34 85.63 2.74%
Rule Maker Stocks
Rec'd # Security In At Value Change
2/3/98 24 Microsoft 1878.45 4011.00 $2132.55
5/1/98 55 Gap Inc. 1890.33 3729.69 $1839.36
6/23/98 34 Cisco Syst 1985.95 3606.13 $1620.18
2/3/98 22 Pfizer 1810.58 3085.50 $1274.92
2/13/98 22 Intel 1862.83 2651.00 $788.17
2/17/99 16 Yahoo Inc. 2020.95 2754.00 $733.05
8/21/98 44 Schering-P 2111.7 2521.75 $410.05
5/26/98 18 AmExpress 1873.20 2176.88 $303.68
2/6/98 56 T. Rowe Pr 1885.70 2093.00 $207.30
2/27/98 27 Coca-Cola 1865.89 1803.94 -$61.95
Foolish Four Stocks
Rec'd # Security In At Value Change
3/12/98 17 General Mo 1230.89 1511.94 $281.05
3/12/98 20 Exxon 1286.70 1487.50 $200.80
3/12/98 20 Eastman Ko 1262.95 1362.50 $99.55
3/12/98 15 Chevron 1250.14 1284.38 $34.23
CASH $185.03
TOTAL $34264.22
Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and
it adds $2,000 in cash (which is soon invested in stocks) every six months.
