Hey, Fools! I thought we'd take a little break from our ongoing study of software companies today, though I intend to continue with that theme next week. But before we move on to today's topic of assessing each Rule Maker holding, there's a bit of news worth sharing related to our software study. Adobe (Nasdaq: ADBE) announced excellent earnings last night. For those of you who are interested in more details, check out this morning's Breakfast With the Fool. Also, if you have any preferences or suggestions as to which direction in the software world we should charge into next, please post your thoughts on the Rule Maker Strategy board. I'll be hanging out there this evening to discuss that and other topics with anyone who's interested.
As longtime readers already know, here in the Rule Maker Portfolio we advocate buying large industry-leading companies of the highest quality and holding them for a long time. This is the best way we know of to combine excellent returns, low transaction costs, and reduced taxes, while also providing a great deal of satisfaction and peace of mind. As an additional bonus, by making consistent purchases on a monthly, bimonthly, quarterly, or even semiannual basis, over a period of 20 or 30 years, a Fool can benefit from the many advantages of dollar cost averaging.
As such, we have spent a lot of time in this portfolio describing and refining our criteria for selecting Rule Maker companies for investment. My co-managers have also recently created what I think is a very logical framework that provides guidance on when to consider selling. Today, I'd like to begin the process of creating a more transparent framework for our monthly additions to the market, which is the decision that we make with far more frequency.
This is another topic that Bill and I have tackled in the past, but which I feel deserves further elaboration. This time, I'd like to approach the issue from a different angle, which is literally to go through our existing Rule Maker holdings and determine whether I'd be comfortable with adding to that position. While this may be a mundane activity, I suspect that it will bring some questions to the fore. I also suspect that this is what many of you at home do when it comes time to add funds to your investments.
Cisco Systems (Nasdaq: CSCO) currently comprises 19.2% of our portfolio. The Kid is also the strongest company in our portfolio in terms of quality and business momentum, as measured by our Rule Maker Master List (linked on the right side of this page). The two questions that immediately come up when discussing Cisco are:
- What limits would one want to set in terms of how large the top holding should become?
- How much should Cisco's valuation -- sky-high by virtually any traditional measure -- weigh in our decision?
As far as portfolio allocation goes, I once heard Tom give a small treatise on the subject. To paraphrase, he said that he would be comfortable having as much as 25% of his portfolio in one stock, 40% in two, and up to 50% in three stocks. I think that's reasonable for this portfolio, though every Fool will want to tailor portfolio limits to his or her own risk profile. Since Cisco is not in immediate danger of exceeding 25% of the portfolio, I wouldn't hesitate to add more if I thought it was the best value for our money.
As far as valuation goes, not all of the managers of this portfolio are of the same mind. I tend to agree with Bill in that we should try to get the best value for our money each month. While I don't have an opinion as to whether Cisco is "overvalued," if I had to choose today, I would prefer American Express (NYSE: AXP) because I feel like our financial services Maker offers a lot of value for the money. AmEx is a company that I feel is a very underrated Rule Maker, and I would be enthusiastic about adding to our holdings in this company.
Intel (Nasdaq: INTC) comprises 16.1% of the port, and as such, I would not hesitate to add to our investment in Intel. Neither Intel's percentage weighting nor the company's current valuation is a huge concern for me.
Yahoo! (Nasdaq: YHOO) is already the third-largest holding in our portfolio. I believe that Yahoo! may have more in the way of expanding possibilities than any other company on the market today. Therefore, I would be quite comfortable adding additional shares of Yahoo! to the portfolio.
The current situation at Microsoft (Nasdaq: MSFT) offers some unique, well, challenges. On one hand, Microsoft's price has become low enough now that even some traditional value investors are starting to become interested. On the other hand, nobody knows what will happen to the company. If the company is split up, we'll likely be in the situation of running each one through the Rule Maker checklist. One of the companies may continue to qualify as a bona fide Rule Maker, while the other may not. Therefore, I wouldn't necessarily want to add to our position until we have some clue as to what the future will bring.
Nokia (NYSE: NOK) and JDS Uniphase (Nasdaq: JDSU) have some tremendous opportunities. While Nokia and JDS Uniphase aren't in my circle of expertise, I wouldn't have much of an objection if the other managers of this portfolio wanted to add to either company at this point.
Pfizer (NYSE: PFE) is still in the midst of its huge acquisition of Warner-Lambert (NYSE: WLA). I wholeheartedly agree with Bill: Companies engaged in major mergers and acquisition activity need to be re-evaluated. With Pfizer/Warner-Lambert, there isn't enough information available as to how the combined company is going to fare. Until more time goes by, I'd prefer holding off on sending any more money Pfizer's way.
Gap Inc. (NYSE: GPS) is a company with slowing business momentum. Conversely, a lot of Gap's problems are simply related to the general malaise (and in some cases, downright slaughter) that has occurred in the retail apparel industry. Because of that, I wouldn't be opposed to adding to our investment in Gap.
T. Rowe Price (Nasdaq: TROW) would be the hardest decision for me, simply because of the fact that T. Rowe has turned in tremendous operating results every quarter since we've owned it. On the other hand, I won't deny that it's not the top dog in the mutual fund industry, an honor that I would have to give to Janus. If we were to widen our search to include other non-bank financial companies, I suspect that we would be able to dig up some companies that have a higher claim to the Rule Maker throne than does T. Rowe Price. Does this qualify as a flawed original purchase decision, as addressed in Bill's article? Or is this a case where we should sell when and if we find a better place to put the money? If we don't consider it one or the other, should we add more money to it from time to time? Until we answer some of these questions, we probably won't be adding any more money to T. Rowe Price.
Schering-Plough (NYSE: SGP), despite Tom's recent confession, is still a strong Rule Maker in the pharmaceuticals industry. Given that the company continues to turn in strong sales growth and has a deep pipeline of products in clinical trials, I happen to think that this company is built to last. I'd not hesitate to add money to this company.
Coca-Cola (NYSE: KO) has shown continuing deterioration in its financials since our purchase of the company. Despite this, the company isn't close to the danger zone in terms of our new sell guidelines. I suspect we will continue to hold Big Red as long as there is a Rule Maker Portfolio, and Bill has lobbied on occasion to add to our position. This is one of those rare times when Bill and I don't agree. I am strongly opposed to adding money to a company that is exhibiting deterioration in its financials, regardless of the price.
What do you say, Fools? The Rule Maker Strategy board is open for discussion.
Finally, I'd like to wish my Dad a Happy Father's Day. Best wishes to all the fathers out there.
-- Zeke
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