By Ethan Haskel (TMF Cormend)
February 9, 2000

I have a confession. Although I usually stick to the rules when investing in Foolish Four (FF) and Beating the S&P (BSP) stocks, I've been known to tinker on occasion.

I don't make wholesale changes, mind you. I consider the Foolish Four rules analogous to a finely tuned Bach Brandenberg concerto. Each note is crafted to create the essence of perfect harmony. But every now and then I get bored with "perfection," and strive for something even more inspired. Maybe a different type of perfection, like the improvisations of Miles Davis' classic jam session, Kind of Blue, performed with John Coltrane, Cannonball Adderley, and others.

My tinkering can take a number of forms. Sometimes I buy slightly more or less of a FF or BSP stock than the strict mechanical investing formula prescribes. Most often this occurs when the BSP and FF formulas suggest two stocks in the same sector. For instance, instead of buying a full weighting of General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> and Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>, I might buy slightly fewer shares of each.

Sometimes I improvise a bit when it comes to holding periods. When making my annual renewals for FF or BSP, I don't always renew exactly one year and a day, like the rules say. Occasionally the indiscretion simply represents laziness on my part. At the renewal date, I just have better things to do. Or I might delay my renewal date until some more funds can be added to my investment pot.

Occasionally "special situations" arise, and the urge to tinker becomes unbearable. The most recent example of such a situation occurred in December, when it was time to renew my Foolish Four stocks. One of the stocks I had in my portfolio was AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>. The FF formula told me to sell it. The Miles Davis in me told me to hold off.

AT&T's stock has significantly underperformed the S&P 500 the past year, as shown in this chart This underperformance probably shouldn't be too surprising, in retrospect. I've shown previously that when FF and BSP stocks split their shares within a year of a portfolio start date, about 90% subsequently underperform the S&P 500. AT&T stock split 3 for 2 in April, and it's been downhill ever since.

The reason I decided to hang onto my old Ma Bell shares just a little longer stems from my experience with a BSP stock, namely Sprint <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %>. Sprint and AT&T have a lot in common. Both are giants in the telecommunications field. Both stock prices were depressed when they joined my portfolio.

Sprint has had a phenomenal run in the last two years, about tripling the return of the S&P 500. But the FON performance chart doesn't tell the whole story. A stockholder in Sprint would have done even better.

In November of 1998, Sprint created a tracking stock for its wireless service, called Sprint PCS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PCS)") else Response.Write("(NYSE: PCS)") end if %>. Each Sprint stockholder was given 0.5 shares of Sprint PCS for each share of the parent company. Since Sprint still maintained control over its wireless unit, the transaction should be differentiated from a true spin-off. In a true spin-off, the smaller company becomes completely independent of its parent.

As of November of 1998, Sprint stockholders found themselves owning a piece of Sprint's wireless tracking stock, Sprint PCS, in addition to the parent stock. The price of the Sprint parent stock dropped slightly to reflect this transaction, but stockholders have been amply rewarded.

Here's the chart showing the price of Sprint PCS stock compared with the S&P 500 since the tracking stock was created. Yes, the S&P 500 line looks almost flat compared with the soaring price of PCS, which has gained about 600% in a little over a year. Who says high dividend investing is boring? If I had dutifully played by the BSP rules, I would have sold my Sprint PCS a long time ago, missing out on the huge run-up.

What does all this have to do with AT&T? It so happens that AT&T is planning to create a tracking stock of its own wireless division, to be called AT&T Wireless Group. The AT&T wireless operations are larger than even Sprint's, and along with Sprint's are the only two truly national wireless operations. When completed, the transaction will likely become the largest initial public offering ever, ahead of the United Parcel Service <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UPS)") else Response.Write("(NYSE: UPS)") end if %> recent offering.

Like Sprint PCS, other wireless stocks have performed well recently. AT&T affiliate Telecorp PCS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLCP)") else Response.Write("(Nasdaq: TLCP)") end if %>, with a much smaller network than the AT&T Wireless Group, has gained almost 50% since its initial public offering just over two months ago. Although the circumstances, and thus fortunes, of any wireless offering are unique, I'm willing to take my chances that the new AT&T wireless offering, planned for the spring, will blossom.

Spin-offs and the issuance of tracking stocks are one way major corporations can unleash the value that often remains hidden in large conglomerates. As noted Thursday, General Motors shareholders will soon get the opportunity to own shares of DirecTV company in the form of Hughes Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GMH)") else Response.Write("(NYSE: GMH)") end if %>, GM's own tracking stock.

For more information on the AT&T Wireless Group spin-off, click here. And here's the Foolish scoop on tracking stocks.

I realize that by tinkering with the stringent rules of mechanical strategies like the Foolish Four and Beating the S&P, I'm heading into uncharted territory. Where no man has gone before. I'm on my own now. Just jammin' with Miles and his smooth trumpet. Hopefully this improvisation will hit a lot of sweet notes.

Beating the S&P year-to-date returns
(as of 02-08-00):

Bank One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %>           -9.8%
PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %>            -5.3%
Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>       -8.8%
Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>    -6.1%
Fannie Mae <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %>         -5.9%
Beating the S&P                -7.2%
Standard & Poor's 500 Index    -1.9%

Compound Annual Growth Rate from 1-2-87:
Beating the S&P               +23.4%
S&P 500                       +17.6%

$10,000 invested on 1-2-87 now equals:
Beating the S&P             $155,800
S&P 500                      $83,500