By Bill Mann (TMF Otter)
October 4, 2002

A quick scan of the headlines will tell you all you need to know about the stock market. Brutal. Painful. Scary. People are taking their money and running.

But what if ad agencies ran market news reports. You'd have the definitive "White Sale," with stuff cheaper than it has been for the last five years. While we don't believe there's much to get excited about in the market short term, we think there's plenty to like about some companies that have dropped massive amounts of market value from their effervescent peaks.

Think about it. We launched the FOOL 50 in January 2000, only a few short months before the bubble started deflating. Now, 33 months later, the FOOL 50 has lost nearly 50% of its total value. Is this a good thing or a bad thing?

Keep a few things in mind. First, as we say every quarter, the FOOL 50 was not set up to be a portfolio -- it's an index, and as such, it's designed to track the stock performance of a large segment of the markets. When the preponderance of large companies drops in value, so generally will the indexes that track them.

Second, we did not consider valuation of companies when we elected to include them in the FOOL 50. "Performance" of the FOOL 50 is tied to tracking values, not outperformance through superior stock picking. Nor would an index do buys and sells based upon some form of valuation criteria. The companies are meant to represent a subset of the global economy. If these subsets become overvalued or undervalued, their representative should reflect this. We make no judgment as to whether or not this is justified.

So the reality is that the drop in the FOOL 50 is responsive to the perceived values of the component companies and the sectors they represent. And since we originally keyed the FOOL 50 to be representative of the most important, dynamic portions of the global economy, this means that those sectors, if we've selected representatives well, have been mauled in the last three years. That stinks for people invested in these companies and sectors, but for an index, it's nothing more than reality. It just is.

For the year, the FOOL 50 has shed 26.4% of its value through the close of the last day of the third quarter. This is nearly identical to the change in the S&P 500, down 26.4%; a bit worse than the Dow Jones Industrials, off 20% on the year; but considerably better than the Nasdaq Composite, down a brutal 37.9%.

For the quarter, the FOOL 50 shed 12.4%, finishing on Sept. 23 at 1043.92.

As we announced at the end of the first quarter, we annually review the components of the FOOL 50 for components that need to be replaced. This year, we flagged ARM Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARMHY)") else Response.Write("(Nasdaq: ARMHY)") end if %>, AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>, and Hughes Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GMH)") else Response.Write("(NYSE: GMH)") end if %>. At this time, we are electing to replace two of these companies -- ARM Holdings and Hughes. ARM Holdings has remained below the $4 billion market-cap floor for much of the year. Subsequent to our decision to replace the company, it warned on its earnings for the quarter, sending the stock plunging another 70% in a single day. Since the company claimed it had good visibility a few weeks prior, we don't think ARM's management represents the best the world has to offer.

Hughes is a little different. We put the company up for potential replacement due to its potential acquisition by Echostar <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DISH)") else Response.Write("(Nasdaq: DISH)") end if %>. This sale is incomplete, pending regulatory approval, but we're no longer comfortable with Hughes' position as a tracking stock for one company that's on the blocks to another. On the face of it, it doesn't have the hallmark of one of the most important companies in the world.

As such, effective immediately, we are removing these two companies from the FOOL 50 and replacing them with two companies nominated by the Fool Community for the FOOL 50 Bullpen: Royal Dutch Petroleum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RD)") else Response.Write("(NYSE: RD)") end if %> and United Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UTX)") else Response.Write("(NYSE: UTX)") end if %>.

AT&T remains on the blocks, pending the completion of its proposed breakup.