INDEX:
I. Market News: The Market Did Move
II. Heroes: Golden Enterprises, Biomatrix, Liz Claiborne
III. Goats: Laserscope, Lubrizol, Midisoft
IV. Investment News: Cash-King-Company Investing
MARKET CLOSE
DJIA: 4755.48, down 39.38
S&P 500: 585.06, down 2.40
NASDAQ: 1036.92, down 2.61
MARKET NEWS
Filling in today, I have to reiterate that, ho-hum, market news isn't of much consequence to most Fools. Reuters describes today's movement, thus: "Stocks tumbled from last week's record levels as nervous investors used weakness in the dollar and bonds as an excuse to take profits." Consider the language of that report: Nervousness, weakness, tumbling, excuses. Perhaps there's something in there for a long-term investor to smile at.
HEROES
Golden Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GLDC)") else Response.Write("(NASDAQ:GLDC)") end if %>, a pretzel-, cheese curl- and pork skin-provider under the Golden Flake brand, today benefited from a weekend Barron's article naming GLDC a "Nifty Little Company." Nifty?! Sales have risen (cough, cough) from $125 million in 1989 to $132 million today; EPS of 43 cents in 1989 are EPS of 43 cents today; and the stock has compounded 1.7% growth annually over the past 3 years versus S&P 500 growth of 12.4% per year. In response to the article, the stock today rose $1 7/8 to $9 1/8, off 10-year lows. Doesn't seem terribly heroic.
Shorters are weeping over Biomatrix <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BIOX)") else Response.Write("(NASDAQ:BIOX)") end if %>. On October 11, when the news was released that Director Rory Riggs had purchased 300,000 shares of BIOX stock at an average cost of $6 1/8, the stock was sitting at $8 7/8. Today, BIOX climbed another $1 1/2 to an all-time high of $11 1/2. BIOX is nearing a four-bagger over the last 10-months. In the past week, the Company has announced two new products, HYLASHIELDNite and HYLASHIELDLite, both effective in treating ocular dryness, itching, and irritation.
Liz Claiborne <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LIZ)") else Response.Write("(NYSE:LIZ)") end if %> stepped out in grand fashion today, announcing third quarter earnings of 64 cents, six pennies above estimates. Margins for the nine months were 5.9% versus 5.2% last year, impressive given the slowdown in retail sales. After touching up against annual highs of $26 1/2, Liz Claiborne closed up $2 to $25 3/4.
GOATS
What happens when you announce a loss of 18 cents for the 3rd quarter when a couple analysts on Wall Street had projected 7 cents in profit? Nothing good. This morning Laserscope (LSCP) did just that and lost its shareholders 28.6% of their investment, as LSCP dropped $1 to $2 1/2. The Company cited an increasing preference for drugs over laser surgery in the treatment of moderate prostate disorders. For those who look at such things, a few months back LSCP underperformed 2nd quarter estimates by 99%. Ahh, repetition!
Earnings disappointments were the order of the day, and Lubrizol <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LZ)") else Response.Write("(NYSE:LZ)") end if %> obliged, posting 44 cents against Street estimates of 59 cents. If you're searching for a tax-loss short into Christmas, LZ might be worth a look. (There are plenty others out there.) Lubrizol fell $2 5/8 to $29 3/8 today, its annual low. The Company cited below-average demand for lubricants in North America; they noted, however, that they'll continue to repurchase their own stock.
More bad earnings on the way. Do you remember when Microsoft announced that they wouldn't renew contracts with Midisoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MIDI)") else Response.Write("(NASDAQ:MIDI)") end if %>, the developer of Windows' Musical Instrument Digital Interface? That was back when the stock was at $13 a share. Today, Midisoft announced a loss of $1.23 EPS versus estimates for a flat quarter, and the stock closed down $1 1/4 to $3 1/2. Ouch. The Company offered no comment in the report. Check it out, Fool, another Goat today that has underperformed Street estimates by 99% two quarters running. And they say the walk down Wall Street is random. Right!
INVESTING NEWS: Cash for the Long-Term Investor
One of the more exciting developments over the next couple weeks and months in Fooldom will be the build out of our Fool's School area, now home to Investing for Growth, Boring Stocks, Neocontrarian investing, Ask Nick our Jobhunter, Beating the Dow, Tax Strategies, and a host of other priceless gems.
We'll be adding new moderators to new folders and expanding some sections into full windows with articles, updated information, contests designed to reward and instruct, et al. This all in the hopes that we can provide the very best information to our readers, else we wouldn't pursue it. It's that simple.
One of the folders which won't undergo a facelift, one of the folders that has stirred up the least activity, and one of the folders which I hope won't house hundreds of posts in the year ahead is my very own folder, Cash-King Investing. Here are three quick quotes from out of the slim 20 posts there to give you a sense of what's going on in the folder. Following them, I'll outline the three-month returns as well as some of the broader aspects of the model.
1. "You should keep in mind that we like to keep things simple here. . . which means that we aim to beat the market soundly, control the number of variables that we need assess, and limit our time commitment by demanding excellence."
2. "I apologize for seeming to disappear from this folder. . . you'll find that the investor who follows cash and remains focused on the decade-forward horizon often loses touch with the market for periods of time any shorter than twelve months."
"3. The professors may study the universe of growth companies, I'm limiting myself to technology companies with high margins, long-term histories of extraordinary business expansion and stock appreciation---they go arm-in-arm---and management teams that, for the most part, look to be wildly bushwacking ahead into the digital world."
Back on July 10th, these were the ten stocks that fell in my group of investments to hold for ten years. They are posted with the price listed and the present price here, and the quarter's returns and an analysis follows.
1. Microsoft: $95 5/8, now $96 3/8
2. Intel: $68 1/4, now $67 1/2
3. America Online: $53 1/8, now $65 1/2
4. The Gap: $34 3/4, now $37 3/4
5. Texas Instruments: $141 7/8, now $142 1/2, (pre-split #s)
6. Hewlett-Packard: $79 7/8, now $91 1/2
7. Silicon Graphics: $43 1/4, now $33 1/8
8. Sun Microsystems: $50 3/4, now $65 1/2
9. Cisco Systems: $55 1/4, now $73
10. Dell Computers: $641/4, now $95 1/4
MSFT: +1.1%
INTC: -1.1%
AMER: +23.3%
GPS: +8.6%
TXN: +0.4%
HWP: +14.6%
SGI: -23.4%
SUNW: +29.1%
CSCO: +32.1%
DELL: +48.2%
The group of ten stocks is up 13.3% over the past three months, making for a 64.9% annualized growth rate. Now, no Fool is going to propose that this group could possibly rise at an annual rate of 64.9%, but had they proposed it three years ago, they wouldn't have been far off. Let's look at how the group has performed annually over the past three years:
MSFT: +35.4%
INTC: +62.4%
AMER: +168.0%
GPS: -0.4%
TXN: +58.8%
HWP: +42.7%
SGI: +57.8%
SUNW: +29.1%
CSCO: +77.6%
DELL: +45.0%
The group of ten stocks is up 57.6% per year over the past three years versus S&P 500 returns of 12.4%. So, how was the group selected? Was it a fluke. . . is there any reason to believe it should continue? Many of the details are outlined in the Cash King folder of The Fool's School-Let's Talk Investment Approaches, and if you have questions, please post them there. . . though, of course, we don't want that folder filling up anytime soon!
Briefly, I've defined cash-king stocks as those that have more cash than long-term debt, more working capital than long-term debt, preferably more current assets than long-term debt, and *ideally* not a dollar of long-term debt on their balance sheet (all available in the S&P Stock Guide). Cash-king investors like to pull debt out of the universe altogether. I've also screened out companies with less than a few hundred million in sales. Lastly, each one of these has been priced off the YPEG ( the year-forward PEG, defined in the Fool Ratio folder of The Fool's School).
Off growth estimates, an understanding of their business, an appreciation for their industry, and the goal of generating maximal profits on minimal research, any Fool can select cash-king stocks to hold for the decade by searching through the S&P Stock Guide, and using the information available here in Fooldom. Once you have. . . is there a reason for the traditionally-underperforming mutual fund, for the dearly-priced full-service broker, for the cocktail party hot-tip, or Senor Dorfman on the one-way screen? You can answer that one.
And do I think the end of the run for this group is imminent?
Not for companies with the cash to separate out only the best opportunities going forward, with strong management, with excellent historical returns, and not when we know their businesses so well here in Fooldom, and can ask questions of a group of industry analysts (Industry Boards) any hour of any day to track each of 'em. No, I think the growth particularly in technology is as much a thing of the future five years as it has been of the past five, and I'd say these cash-rich juggernauts are in pretty good position to take advantage of 't.
- Tom Gardner, 10/23/95