<FOOLISH FOUR PORTFOLIO>

Alternate Fool 4 Stocks
Different strokes for different folks

by Chris Rugaber
([email protected])

Alexandria, VA (January 7, 1999) -- See what happens when the Dow starts to act like the Standard & Poor's 500 Index and jumps up 2% or so in a day? As of last night, our Foolish Four (RP4 version) stocks were up 6.48%, way ahead of the S&P 500's puny 4.9% and the Dow's 3.55%. Hah! We're ahead of the S&P! Woo-hoo! Well, OK, that's only after a couple of weeks. (Remember, we made our purchase on December 24th; that's why the "Year" numbers and the "History" numbers in our returns are different). Maybe we're being a bit premature, but we'll take any opportunity to point out when we're ahead of the S&P.

Earlier this week, Ann Coleman noted that the top Dow stocks in RP order -- the stocks with the 10 highest RP scores, which is the yield divided by the square root of the price (or the yield squared divided by the price) -- have bounced around a bit since the beginning of the year, and that any one of several other stocks may have been purchased by those starting their Dow investing portfolios after our switch. Some of you may have picked up shares in Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %>, or General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %>, or DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %>, rather than International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %>. Some of you have asked that we check up on these companies periodically as well as the ones that we actually bought.

In that spirit, we should first point you to our Dueling Fools on Sears, which was posted yesterday. It does an excellent job of describing Sears' revenue sources and business model. If you do own Sears as part of a Dow Investing portfolio, don't be too upset by the Bear argument. Even if Warren Gump's arguments against Sears put you into a cold sweat, remember why you bought Sears (It was on the list, remember? It's supposed to look bad right now.) and vote for the bull!

Among the other potential Foolish Four stocks, GM has been in the news a bit lately. The annual Detroit Auto Show took place earlier this week, and there the world's largest automaker announced a 3% sales increase in December, significantly above analysts' projections of a 5% decline. They also discussed their continuing cost-cutting initiatives and some of their goals for the upcoming year. This probably explains why their stock has jumped about 10% this week.

GM was able to cut $4 billion in costs last year as a result of their restructuring efforts, and they plan to cut another $4 billion this year. Most of their savings resulted from reduced material costs and fewer warranty claims and from the maintenance of some expense controls that were put in place during last summer's strike. Of course, their cost of goods sold was $146.6 billion in 1997, and their SG&A (sales, general, and administrative) expenses were $16.2 billion, so these cuts need to be put into perspective.

In addition to reduced expenses, GM's restructuring has enabled the company to move more quickly with new models. Development of new vehicles can now be done within 24 months, according to GM's President Richard Wagoner, as opposed to the 42 months it took five years ago. Finally, GM hopes the cost cutting will move them closer to their goal of a 5% profit margin on North American sales. However, the company's chief of North American operations acknowledges that they still need to take "big strides" to bring manufacturing costs in line with those of their competitors. They'll need the cooperation of the United Auto Workers (UAW) to do that, given that GM has experienced 16 factory-level strikes in the past five years. Apparently, GM chairman John Smith Jr. and GM's labor negotiator toured the auto show with a UAW official, a sign of a "thaw in relations," according to The Wall Street Journal.

In the shorter term, and this is more likely what the market responded to, sales and profits may increase in 1999 as pent-up demand for some of GM's trucks is finally met with increased production. GM hopes to increase market share from the 29% they achieved in the first 11 months of 1998 to over 30% in 1999. The company expects that increased truck sales and simply not having a strike will be worth 2.5% more in market share by themselves.

Consensus estimates for 1999 earnings per share (EPS) are around the $8.00-$8.10 mark, but after the auto show, some analysts are leaning more towards $9 per share. If so, this Dow Dog stock may do some tricks in 1999.

Until next week, Fool on!

Today's Stock Lists | 1998 Dow Returns

01/07/99 Close
Stock  Change   Last
--------------------
CAT  +   7/16  48.94
JPM  +1  3/4   113.00
MMM  -2  3/4   76.75
IP   -   3/4   42.56

                   Day   Month    Year   History
        FOOL-4   -0.67%   4.22%   4.22%   5.77%
        DJIA     -0.08%   3.88%   3.88%   3.47%
        S&P 500  -0.21%   3.30%   3.30%   4.69%
        NASDAQ   +0.23%   6.08%   6.08%   7.54%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpilla    43.08     48.94    13.60%
 12/24/98    9 JP Morgan    105.51    113.00     7.10%
 12/24/98   14 3M            73.57     76.75     4.32%
 12/24/98   22 Int'l Pape    43.55     42.56    -2.27%


    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpilla  1034.00   1174.50   $140.50
 12/24/98    9 JP Morgan    949.62   1017.00    $67.38
 12/24/98   14 3M          1030.00   1074.50    $44.50
 12/24/98   22 Int'l Pape   958.12    936.38   -$21.75


                             Cash     $28.26
                            TOTAL   $4230.64

</FOOLISH FOUR PORTFOLIO>