exit stage left ...
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[Motley] Fool To Sell COMS, INVX, KLAC, and portions of AOL & AMZN
November 25, 1998
The managers of the Rule Breaker portfolio (a.k.a. The Fool Portfolio -- cyberspace's original and best-performing portfolio started in 1994 by David and Tom Gardner with their own real money) announce today that at some point in the next five market days we will sell 3Com, Innovex and KLA-Tencor, and we will also sell minority portions of our two best-performing stocks, America Online and Amazon.com.
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3Com, Innovex & KLA-Tencor
3Com, Innovex, and KLA-Tencor are three good companies with bad stocks. These are among our biggest losers in the portfolio, and in conformity with our first sell reason listed above, we think we can invest this money better elsewhere. Where? Well, in Rule Breakers, in companies that follow some of the new principles (some of them are restatements of the old ones) for growth stock selection being developed and laid out at Fool.com and in our upcoming book. (More about that later.) In Foolish form, we're jettisoning our losers and looking to plow the money back into some stocks that we think will do better going forward.
Not only have these three stocks been market laggards for us, but also due to the nature of their businesses (at least in their present incarnations) we find them the three hardest stocks to follow and understand. In each case, when we bought the stock we felt we had a fairly good understanding of each business and its challenges. But following them has been more difficult than we thought. Whether it's 3Com's difficultly worded press releases (we'll grant them the technology is complicated), Innovex's announcements that come few and far between, or KLA-Tencor's equipment, which we will never have the benefit of using for ourselves, these are basically not consumer businesses.
If you want to generalize about a lesson we take away from all three, it is NOT that they're bad businesses or bad stocks. Rather, it's that networking gear, lead-wire assemblies, and yield monitoring equipment just are not consumer businesses, making it very difficult for average-guy investors like us to figure out WHY things have gone wrong when they do go wrong. The act of selling these stocks and moving it into more consumer-oriented businesses (or at least, simpler businesses to understand and to follow) is a generally good one. And we will of course expect to be investing the money in more profitable prospects, to boot.
It's important to point out, however, that if we didn't need to raise cash for new buys we wouldn't be selling the stocks. Go back to selling reason number one: We only sell when we think we've found something better. We still admire all of these companies -- our tastes aren't that fickle and these firms have continued to execute very well (3Com excluded, at times). We wish them the best and we wouldn't be surprised if they achieved great success -- we'd be happy and perhaps even vindicated! There is plenty of reason to expect them to succeed. Let's take a last brief look at each:
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Innovex (Nasdaq: INVX)
Innovex has some similar aspects of greatness: great management. This disk-drive-related company is one of the few making money in hard industry times. We bought Innovex in the summer of 1997 during the disk drive downturn; though, the industry wasn't done "turnin' down" apparently! The stock first rose 35%, but then earning revisions began to pour in as the industry continued to slow and Innovex declined over 45% from our buy price. Like KLA-Tencor, this company is one of the few in its industry that has made money the past 16 months, but it's still a victim rewarded with a low multiple to earnings.
Lately, competition is taking market share. Innovex is addressing the situation with new technology due to ramp next year, and it's also branching into significant other businesses, including chip packaging. (See our recent interview <http://www.fool.com/foolaudio/transcripts/stocktalk981120_Innovex.htm> with the CFO.) The company could be positioned for strong growth again (it has whooped the market this decade), and it has excellent management to see it through. This high-margin company is probably, again, the one to own if you're investing in this area of the economy. We simply feel that we will find someplace better -- better and easier to track and understand -- and presumably, one on which we do not lose money.
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