Fool Portfolio Report
Friday, July 12, 1996

Friday, July 12, 1996 (FOOL GLOBAL WIRE)
by David Gardner

ALEXANDRIA, VA, July 12, 1996 -- The Fool Portfolio continued its week of getting beaten up, losing its Friday race against the indices by a longshot, off 1.44%. That's thanks mainly to a drop of $1 1/8 by Iomega; our other holdings (as you can see in the window below) were mixed, making for a wash.

Chevron, hanging tough, led the portfolio's gainers yet again.

For the week, all three of our competitors made poor shows. The NASDAQ dropped most of all this week, off several percentage points, followed closely by The Fool; the S&P 500 declined a couple percentage points, but remained strong in comparison.

For July, we see more of the summer selloff taking shape. The Fool and the NASDAQ have lost 7% so far this month, while the S&P 500 is off about 4%. Following a bad June, we are seeing a significant short-term decline that has taken both market indices down to almost identical 1996 returns: for 1996, the NASDAQ is up 4.88%, while the S&P 500 is up 4.89%.

The Fool Portfolio, despite seeing its gains more than halved over the past couple of months, remains up more than 10 times those '96 returns: a heart-stopping 49.61%.

Fool HQ, like many of its readers, primarily awaits next week's report from Iomega, which is due to announce second-quarter earnings Wednesday, July 18th. Many of us expect the company to substantially outperform the Street's 10 cents per share estimates; I have our readership provide more solid numerical study of this company's second quarter in the Iomega folder than for any company and any quarter ever... it's truly amazing.

Last year, you'll recall, IOMG lost 0.02 per share in its June quarter. It's this ongoing transition from negative earnings to positive earnings that makes past P/E analysis so useless -- for this company or any other. I continue to hear from time to time someone or another say, "Iomega is so overvalued... just look at the P/E!" The P/E at market close today was 164.1... a stock price (P) of $26 1/4 divided by earnings per share (E) of 16 cents.

If the company reports 14 cents per share in earnings next Wednesday (which is a sort of consensus number from those doing analysis in Fooldom) what will the P/E suddenly be then?! Halved. Take the +14 cents and supplant the -2 cents, and you have 16 cents more, on top of the current earnings per share (EPS) of 16 cents. That makes EPS of 32 cents per share... a P/E of 82.

It doesn't take a terribly enterprising imagination to see the P/E continuing to "normalize" in the next quarter and beyond. Current institutional estimates say 14 cents for the third quarter, vs. 2 cents last year. We consider these estimates low again... let's just say we see earnings four cents ahead again, at 18 cents. That's 16 cents more to EPS... EPS becomes $0.48, making the P/E at today's price 55... how about that? Even if the price were to stay the same for the next 6 months, we've seen how the P/E could drop more than 100, from 164 to 55.

Look ahead at the institutional estimates a year from now and you'll see once again a conservative estimate, 87 cents. At today's price, that makes a P/E ratio of 30... are we getting the point? When a company transitions from losses to profits, using the P/E ratio to analyze valuation is unhelpful, and skews the picture of what will likely happen going forward.

We continue to expect these shares to move back toward J.P. Morgan's target price of $42, and I personally believe that next week's earnings report will be a contributing cause.

We had a delightful message in our Suggestion Box today from a young man in Boston, MA. It read: "I'd like to thank you for convincing me not to invest. After reading through your site, I have learned that I have a lot of

things to take care of (credit card balances, family budgets, etc.)

and a fair amount of things to learn before I should even consider

buying some stock. After the hype I have been receiving from my friends [DG note: brokers, one wonders?], this is a great relief to find out. However, I have enjoyed learning what I have learnt so far, and look forward to continued learning via the FOOL. Thanks for a sensible and well-considered approach to financial advice."

The Motley Fool's mission was, is, and always will be education. Those unfamiliar with our work half read about how much we love the stock market and sometimes end up characterizing Foolishness as too risky, or touting, or "Internet chatter," what have you. We're sorry they didn't take the time to read our 13 Steps to Investing Foolishly, particularly The Second Step, right out of the gates: Settle your personal finances first.

It is a great pleasure for us on a daily basis to mix with people like Dave Benjamin, who are prudent, intellectually curious, and eminently Foolish. That's a piece of heaven on earth, if you ask me. (Dave added: "Now that I spout Foolish wisdom, my Dad has suddenly started calling me on random evenings to discuss world events, as well as the financial world. Who knew? I must be getting old...")

A final note: We got a thoughtful note from MARKUP42 this week, reacting to my Wednesday piece on The Gap's tiff with May Department Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MA)") else Response.Write("(NYSE:MA)") end if %>. "Whether the court misled Gap or not, we live in a capitalist system, thank goodness, and if May bid $19 million [for a distribution center property] and Gap bid $18.5 million, then May deserves to win." We completely agree, and never meant to suggest otherwise. Most of my piece was tongue-in-cheek... for both of these companies, less than $20 million is a drop in the bucket, and I never intended to suggest that the story was particularly meaningful. It was just a Foolish thang to make jokes about.

I did talk a little trash about May, since analysts were estimating the company's same-store sales for June to come in flat (they ended up coming in at 0.2%), and Gap and Sears were both projected to put up substantial gains (which they did, both in excess of 6%). Anyway, MARKUP42 went on to note that "May Company has had 21 consecutive years of record sales and EPS and the stock has returned an average of 20% a year for the past 15 years." That's outstanding.

We can only hope the same for any investment we undertake. Fool on!

--David Gardner, July 12, 1996

Transmitted: 7/12/96

                Day   Month    Year  History
        FOOL     -1.44%  -6.92%  49.61% 179.36%
        S&P 500  +0.05%  -3.67%   4.89%  40.93%
        NASDAQ   -0.25%  -6.88%   4.88%  53.22%
*Scroll down or expand screen for full portfolio accounting
AMER + 3/8 ...CHV + 5/8 ...GE + 1/8 ...GPS - 1/2 ...
IOMG -1 1/8 ...KLAC - 3/8 ...MDRX + 1/4 ...S + 1/8 ...
    Rec'd   #  Security     In At       Now    Change
  5/17/95 2010 Iomega Cor     2.52     26.00   932.17%
   8/5/94  680 AmOnline       7.27     38.25   425.93%
  4/20/95  310 The Gap       16.28     30.00    84.33%
  1/29/96  250 Medicis Ph    27.86     44.00    57.93%
   8/5/94  165 Sears         28.93     44.88    55.14%
  8/11/95   95 GenElec       57.91     84.00    45.04%
  8/11/95  110 Chevron       49.00     61.13    24.75%
  8/24/95  130 KLA Instrm    44.71     19.75   -55.83%
    Rec'd   #  Security      Cost     Value    Change
  5/17/95 2010 Iomega Cor  5063.13  52260.00 $47196.87
   8/5/94  680 AmOnline    4945.56  26010.00 $21064.44
  4/20/95  310 The Gap     5045.25   9300.00  $4254.75
  1/29/96  250 Medicis Ph  6964.99  11000.00  $4035.01
   8/5/94  165 Sears       4772.65   7404.38  $2631.73
  8/11/95   95 GenElec     5501.87   7980.00  $2478.13
  8/11/95  110 Chevron     5389.99   6723.75  $1333.76
  8/24/95  130 KLA Instrm  5812.49   2567.50 -$3244.99
                             CASH  $16434.53
                            TOTAL $139680.16