Fool Portfolio Report
Thursday, July 18, 1996

Thursday, July 18, 1996 (FOOL GLOBAL WIRE)
by Tom Gardner

ALEXANDRIA, VA, July 18, 1996 -- Being Foolish today was sweet---sweet like sugar and sweet like wine---as all but two of our holdings climbed higher. While the NASDAQ rose 22.02 points (+2.13%), and the Dow pushed up 92.48 (+1.72%), and the S&P 500 climbed 10.10 points (+1.50%), The Fool Portfolio cruised ahead of them all, up 2.64%, or $3500 on the day.

This day would have been sweeter still, unbearably sweet, but that our second-best performer, America Online, came up lame one time more. AMER fell $2 3/8 to close bidding $29 3/4 as Smith Barney reiterated its Neutral rating again this morning. While today's price still marks a 309% return for our AOL shares since August, 1994---well ahead of the 40% growth from the S&P 500 over the same period---it includes as well a 57.5% drop in the value of this company since their third-quarter earnings announcement and conference call eight weeks back.

On June 3rd, with the stock trading at $56 1/2, I inked a detailed report (6/3/96: Valuing AMER) on what I considered to be---and still consider to be---some of the profound problems America Online is facing, and what we might expect if the company remains committed to its present business and distribution plans. The words of Intel CEO Andrew Grove, quoted in that report, ring ever more true today

"Almost every industry faces critical survival tests during which a company must respond to sudden new demands and market forces. I call these times strategic inflection points. It represents profound change. As an outsider, I believe a business must alter its core strategies, reinvent itself, and change its emphasis--or face potential extinction."

Unfortunately, activity at AOL Headquarters lately does not yet indicate that the Company is adequately equipped to deal with these strategic inflection points, to alter their core strategies and to reinvent themselves. The lack of sophisticated marketing plans---that promotion and service which creates a lust for the product---, the recent dismissal of COO Bill Razzouk, some ongoing capital constraints, the recent settlement of a class-action suit that hits harder at reputation than pocketbook, and a rapid slowdown in subscriber growth all have contributed to the halving of this stock over the last eight weeks. (AMER Graph: Weekly for 1 year)

Now what has been of an extraordinarily high quality over at America Online is the technical side of this business. Capacity problems have been alleviated. The graphical interface continues to shine in the wake of AOL's brainy acquisition of Johnson-Grace Publishing. Simply put, America Online remains the shining leader on the technological side of this business, from capacity to interface. And the Company shows no signs of giving up that lead.

But where they are faltering, they're getting bitten for it. The member experience has clearly weakened in recent months, neatly correlating with the launch of the Have you got a million bucks in your pocket? campaign. It's sad. At a dinner in New York this past week, I spoke with a three-year veteran of the service who told me that she would be abandoning America Online for good this month. Why? She was tired of being hit over the head with advertising that wasn't properly integrated into the service.

She said, "It's one thing to see an ad for a trip to Hawaii when you're in the travel section; it's quite another to feel like you're watching late-night TV every time you hit their mainscreen. I don't like that feeling. And I definitely don't like to pay for that feeling."

Additional to these problems on the content side are AOL's mounting difficulties on the business side. The Company has tried to unbrand its content providers, pouring in new sites at a rate of one per day over the past six months (cf. New Features & Services). That isn't a filter for customers. That's the Web. And business-wise, it becomes extremely difficult for AOL to manage hundreds of new relationships every year and to attach the appropriate values contractually to each one. It's impossible. It's a nightmare. And the nightmare of that business structure has found its way to the ears on Wall Street and Main Street, where investors have sold this issue to the tune of 57% losses in less than a quarter.

Those words of Andrew Grove---that reinvention of a Company at a critical point in time---are increasingly powerful ones now. AOL has now witnessed a startling de-valuation of some $4.5 billion off its capitalization in two months' time. Is this simply volatility? Since announcing earnings on May 8th, AOL is down that 57%, and the NASDAQ is off 6.3%. It's moving separate from its peers, indicating some unique perception and business-fundamental problems.

For us, well, when the NASDAQ climbs 22 points, with technology issues beating a path upward, it's discouraging to see our number two horse coming up lame again, losing $2 as AMER did today. As always, we do not pull the transaction trigger hurriedly. Veteran Fools know that our long-term approach to profit on the public markets motivates us to thoroughly engage a business, to seek to uncover its potential and to assign an earnings- and cashflow-driven price for its shares in the year(s) ahead.

Rightly or wrongly, we believe in being patient before buying and patient before selling. Anyone who witnessed the 50% gutting of Sonic Solutions in 1995 knows that our patience can hurt. But we believe that the discipline of pause pays far more substantial rewards the other way. The Fool Portfolio has risen 47% in 1996, a smashing 43% higher than the S&P 500. Since our inception on August 4, 1996, we're up 175% versus S&P gains of 40%.

Why list those numbers here? Because we think they help illustrate that patience is fundamental to bottom-line, post-commission, enduring market outperformance. To say nothing of the values it brings to life.

Patience.

And what better segue into this evening's quarterly earnings report from Iomega than that? Iomega announced 2nd quarter earnings after market-close today, posting 11 cents per share, off revenues of $283 million. Iomega outperformed Street estimates of 10 cents for the quarter, but fell short of Fool-Board estimates of 15 cents. Apparently the stock is bounding around between $25-$29 in after-hours trading on the Instinet---of whatever import that is.

This is an exciting time, eh? Our Fool AOL chat rooms are brimming with activity . We two, too, are wondering where the stock will open, and how the Street will view this announcement in the weeks ahead. On the one hand, you have mildly-disappointing sales. $283 million fell below many estimates. Apparently---and I stress apparently because I haven't accessed the conference call yet---international sales were not as strong as expected. And the earnings of 11 cents per share no doubt disappointed some Fools.

On the other hand, Iomega just posted sales growth of 27.7% and earnings-per-share growth of 37.5% from 1Q to 2Q in 1996. Profit margins rose from 4.56% to 4.96%. And the Company announced this morning that it would be purchasing a new manufacturing plant in Malaysia from Quantum. The plant will initially be used to produce Jaz drives and disks, exclusively. This announcement helped push IOMG shares to $28 today, up $2 on the day.

We will be digging through these numbers in the days ahead and reading through your evaluations quite carefully in the AOL Iomega folder. For long-term investors, valuation decisions are far and away most difficult around earnings time. We believe the story is told right here in these performance statements, meaning that we think it takes a very careful---not casual---review of them to have any foundation for fair pricing.

I'm particularly proud to be associated with The Motley Fool in times like these---a cooperative enterprise that has attracted so many people to a discussion of the earnings report, rather than the rumor. We don't have ten AOL chat rooms assigned to the discussion of the latest whispers on Wall Street, but we love to see and meet that demand for earnings talk.

As The Motley Fool continues to blossom with your help, I'm excited to see that all signs point toward better financial education in the US and, consequently, more sophisticated investing. . . and consequently, better investment returns. These 10Qs, the quarterlies, tell the value of public companies. The latest breeze blown through media organizations, curiously right before equity-option expiration day, don't. Can we not quantify the value of that enlightenment---that financial statements are easily untangled, and that sales, earnings and cashflows ARE the story? Can we not? I expect that learning will translate into market-beating returns, counted as better than 10% growth per year over the next handful of decades. Awesome.

Elsewhere in The Fool Portfolio!

Medicis rose $2. Gap shares rose $1 1/8 to $32. And Sears rose $1/4, after smushing Street estimates like a red grape. I will review that Sears earnings report in next Tuesday's portfolio report, after getting a chance to listen to the Sears conference call later this evening.

If you own shares of Sears or Iomega, I hope you'll consider listening to what your businesses have to say. Here are the numbers:

IOMEGA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %>
1-800-633-8284 (code: 1837381)
replay (after 6:30 pm EDT)

SEARS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %>
1-800-865-4460 -- replay
(Every hour every hour, call in 5 minutes before the hour.)

Fool on,

Tom Gardner

ANOTHER FOOLISH THING: Iomega in Fooldom Today!

DO YOU WISH you could scour our voluminous AOL Iomega message folders each day, but for some ridiculous reason, find that you just don't have the time? Or do you actually take the time to read every Iomega post, but find yourself somehow surrounded by people urging you to get a life? Rejoice! The Motley Fool has heard the cry of those feeling overwhelmed by the folder, and has begun offering a daily digest of it. Sporting the best posts from the last 24 hours, "IOMG in Fooldom Today" can be e-mailed to you five times a week. And the price? At the moment, it's quite reasonable -- it's free. If you'd like to sign up, simply send an e-mail to [email protected] from the address where you'd like to receive the reports. Make sure you type "subscribe" in the body of the message. (MFiomg is an automated account, not a person.)

(c) Copyright 1996, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

                Day   Month    Year  History
        FOOL     +2.64%  -8.13%  47.66% 175.71%
        S&P 500  +1.50%  -4.03%   4.49%  40.40%
        NASDAQ   +2.13%  -6.35%   5.48%  54.10%

*Scroll down or expand screen for full portfolio accounting

AMER -2 3/8 ...CHV +1 5/8 ...GE + 7/8 ...GPS +1 1/8 ...IOMG +2...KLAC - 1/8
...MDRX +2...S + 1/4 ...


    Rec'd   #  Security     In At       Now    Change

  5/17/95 2010 Iomega Cor     2.52     28.00  1011.57%
   8/5/94  680 AmOnline       7.27     29.75   309.05%
  4/20/95  310 The Gap       16.28     32.00    96.62%
   8/5/94  165 Sears         28.93     46.25    59.90%
  1/29/96  250 Medicis Ph    27.86     41.50    48.96%
  8/11/95   95 GenElec       57.91     83.75    44.61%
  8/11/95  110 Chevron       49.00     58.75    19.90%
  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  56280.00 $51216.87
   8/5/94  680 AmOnline    4945.56  20230.00 $15284.44
  4/20/95  310 The Gap     5045.25   9920.00  $4874.75
  1/29/96  250 Medicis Ph  6964.99  10375.00  $3410.01
   8/5/94  165 Sears       4772.65   7631.25  $2858.60
  8/11/95   95 GenElec     5501.87   7956.25  $2454.38
  8/11/95  110 Chevron     5389.99   6462.50  $1072.51
  8/24/95  130 KLA Instrm  5812.49   2567.50 -$3244.99


                             CASH  $16434.53
                            TOTAL $137857.03