<THE RULE MAKER PORTFOLIO>
What, Me Worry?
Ten holdings, ten concerns
By Tom Gardner
ALEXANDRIA, VA (March 25, 1999) -- Even on a day that the stock market rose 1.69%, even on a day when our portfolio climbed an additional 3.06%, even then, there is always a reason to worry. Of course, I feel sorry for the market bears who have been so worried about the equities markets that they've missed most or all of the bull market (which dates back to 1994, 1990, 1987, 1981, 1975, 1950, 1925, depending on your perspective). They have missed the greatest and most accessible engine of wealth creation in the history of man.
And yet, though I am supremely confident about the performance of equities in America over the next twenty-five years, and though I love the ten companies we hold in the Rule Maker/Tweener portion of this portfolio, nevertheless, I can always worry about this account. After all, there are no guarantees in the public markets (and just as few in life). Blindly buying and holding your investments makes as little sense to me as obsessing over the temporary valuation of a corporation's shares.
Betwixt the two is that prudent concern for the progress of the businesses you own and the people who manage them. In that spirit, I share today my primary concerns for the ten companies held in our Rule Maker Portfolio:
- Microsoft (Nasdaq: MSFT) has risen 129.9% for us since February 1998 -- it now represents more than 12.5% of our account. My primary concern about the software giant is the same uneasiness we might experience in re-reading the life of Xerxes. The hubris that undermines competitive instinct, the tragic flaw of the most gifted in every field and every market, is Microsoft's greatest competitor.
- Gap Inc. (NYSE: GPS) has risen 94.6% for us since May 1998, and it now represents 10.8% of our total account. Gap has been heaped with praise on our Rule Maker Strategy message folder, celebrated as the best advertiser in our portfolio (you can share your opinion and earn a free copy of Industry Focus 1999). What is there to worry about with this company whose stock has compounded in excess of 30% growth per year during its 22 years in the public markets? Gap has been shouldering additional debt to expand internationally and increase its branding campaign. Though the debt is in a historically low interest rate environment, borrowing is never a positive in my book. We'll have our eye on the accumulation of debt and the use of the capital.
- Cisco Systems (Nasdaq: CSCO) has risen 83.9% for us since June 1998. It now represents 10.7% of our Rule Maker assets. Cisco's primary risk is in its technology and marketing lead. My only real worry is the health of John Chambers and the other leaders of the company. Obviously, a technology shift could hurt Cisco, but the company is just a power in today's market.
- Pfizer (NYSE: PFE) has risen 67.4% since February 1998 and now represents 8.9% of the Rule Maker Portfolio. When I worry about Pfizer, I worry about its policy for revenue recognition. In the most recent quarter, our drug-maker's accounts receivable climbed by 23% over the same period last year. And this came while sales grew 17%. I hope Pfizer isn't feeling beholden to the financial markets. I hope our guys and gals aren't compromising long-term operational success for short-term stock performance.
- Yahoo! (Nasdaq: YHOO) has risen 41.7% for us, just since February 1999. It now represents 8.4% of this portfolio. While the Conventional Wisdom (eek -- run!) is terrified of the company's valuation (after today's $18 per share climb, the company is valued at $36 billion), all things considered, I believe this company may be dramatically undervalued, looking ahead five years. The emphasis goes on the words "may be" because Yahoo! will likely face the world's largest company, the $454 billion behemoth Microsoft, in head-on competition. In consumer markets, convenience is the name of the game (heck, we'll pay $6 for a cup of coffee if it's around the corner). Thus, if Microsoft makes it more convenient to use its search engine than Yahoo!'s, yikes. We will certainly be rewarded for following the operational direction of Yahoo! For now, I'm obviously a strong believer.
- Intel (Nasdaq: INTC) has risen 39.3% for us since our purchase in February 1998. The chip designer now represents 7.6% of our account. How can we be concerned about an emerging technology monopoly that just successfully settled with the Justice Department? Well, Intel was able to settle, I believe, because processor speed will not be so important as network speed in the years to come. It will still be critical, but not entirely so.
- Schering-Plough (NYSE: SGP) has risen 17.5% for us since August 1998, meaning that it has underperformed the S&P 500 over that period. Today, the drugmaker represents just 7.3% of our portfolio. My primary concern about The Plough is the same as that of many. Today, the company relies very heavily on the patents tied to its antihistamine product, Claritin. The expandability and defensibility of those patents internationally coupled with the standard pipeline concerns with every drug company sometimes worry us on a rainy day.
- American Express (NYSE: AXP) has risen 17.7% for us since May 1998. It too has underperformed the S&P 500 over that time. AmEx now represents just 6.45% of our portfolio. Concerns? 1) The competitive nature of consumer-credit products. 2) The real challenges to American Express Financial Advisors posed by an increasingly educated body of consumers. So long as American Express can continue to strengthen its brand by concentrating on insanely good service to its customers, I don't worry terribly much.
- T. Rowe Price (Nasdaq: TROW) has not risen for us. Its stock is down 0.14% since our purchase in February 1998. TROW has declined to just 5.5% of this portfolio, having been thrashed by the S&P 500 by more than thirty percentage points. I have the same concern for this company that I have for any professional money managers who rely on fees in excess of those tagged to an index fund. Additionally, our portfolio management team must look very closely at T. Rowe Price's executive options plan. Perhaps that ought to be our next "Question of the Week."
- Coca-Cola (NYSE: KO) has fallen 4.7% for us since our February 1998 investment. Coke makes up as little as 5.2% of our total portfolio. Weekly moves in the price of Coca-Cola stock are now largely inconsequential to the performance of this portfolio. Of course, that may not always be true, but it is today. My chief concern about Coca-Cola? A month ago, a highly respected doctor advised me to reduce my levels of sugar intake -- starting with soda. I haven't had a soft drink since and -- gasp! -- I do recognize a difference.
Every investor, even a Rule-Making investor, should worry a little about the performance of the businesses they own. Do you have any concerns about our companies? Share them in our Rule Maker Companies message folder linked below.
Tom Gardner, Fool
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Stock Change Bid AXP +5 3/8 122.50 CHV +1 7/16 86.94 CSCO +3 107.44 KO + 1/2 65.88 GPS +3 7/8 66.88 EK + 1/2 65.63 XON + 1/2 71.44 GM +1 9/16 87.19 INTC -1 5/16 117.94 MSFT +8 11/16 179.94 PFE - 3/8 137.75 SGP +1 1/16 56.38 TROW + 1/8 33.63 YHOO +18 1/2 179.00
Day Month Year History R-MAKER +3.06% 7.76% 12.33% 42.14% S&P: +1.69% 4.17% 5.26% 30.25% NASDAQ: +2.94% 6.42% 11.04% 47.31% Rule Maker Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 179.94 129.90% 5/1/98 55 Gap Inc. 34.37 66.88 94.58% 6/23/98 34 Cisco Syst 58.41 107.44 83.94% 2/3/98 22 Pfizer 82.30 137.75 67.38% 2/17/99 16 Yahoo Inc. 126.31 179.00 41.72% 2/13/98 22 Intel 84.67 117.94 39.28% 5/26/98 18 AmExpress 104.07 122.50 17.71% 8/21/98 44 Schering-P 47.99 56.38 17.46% 2/6/98 56 T. Rowe Pr 33.67 33.63 -0.14% 2/27/98 27 Coca-Cola 69.11 65.88 -4.68% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 17 General Mo 72.41 87.19 20.42% 3/12/98 20 Exxon 64.34 71.44 11.04% 3/12/98 15 Chevron 83.34 86.94 4.31% 3/12/98 20 Eastman Ko 63.15 65.63 3.92% Rule Maker Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 4318.50 $2440.05 5/1/98 55 Gap Inc. 1890.33 3678.13 $1787.80 6/23/98 34 Cisco Syst 1985.95 3652.88 $1666.93 2/3/98 22 Pfizer 1810.58 3030.50 $1219.92 2/17/99 16 Yahoo Inc. 2020.95 2864.00 $843.05 2/13/98 22 Intel 1862.83 2594.63 $731.80 8/21/98 44 Schering-P 2111.7 2480.50 $368.80 5/26/98 18 AmExpress 1873.20 2205.00 $331.80 2/6/98 56 T. Rowe Pr 1885.70 1883.00 -$2.70 2/27/98 27 Coca-Cola 1865.89 1778.63 -$87.27 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 17 General Mo 1230.89 1482.19 $251.30 3/12/98 20 Exxon 1286.70 1428.75 $142.05 3/12/98 15 Chevron 1250.14 1304.06 $53.92 3/12/98 20 Eastman Ko 1262.95 1312.50 $49.55 CASH $185.03 TOTAL $34198.28
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.