<THE RULE BREAKER PORTFOLIO>
No Place Like @Home
Good stocks like wine
By David Gardner (MotleyFool)
ALEXANDRIA, VA (May 5, 199) -- May 1999 remains for us a poor month of investing, despite a nice gain today for the Rule Breaker Portfolio. Our assets appreciated 3.21% in value, outpacing the S&P 500's 1.15% gain and the Nasdaq's 2% rally. Still, for May we remain down 7% versus a rising S&P 500. (For the year, the BreakerPort passed the 50% gain mark today, well ahead of the S&P 500's 10% benchmark.)
One passes one's eyes over the portfolio's movers and shakers today and -- zounds! -- one cannot help but notice that one of our stocks finished way ahead of the pack. @Home (Nasdaq: ATHM) rose $19 1/4 (14%) to close just short of $155.
Let's spend today's recap making two critical observations about today's move.
First, yowser. (That was easy.)
Granted, we don't get particularly excited about one day of stock appreciation for any of our stocks, just as we don't get too depressed by any short-term period of laggard performance (as we've seen the past few weeks). In the year 2030, when we begin to think about maybe liquidating some portion of this portfolio, we doubt we'll remember much about May of 1999. Who knows what incarnation -- what form -- @Home will be taking, by then! (Interplanetary cable access? I can see it now!) Still, if you're going to follow your stocks on a daily basis (as we do our sports teams, as well), it's fun to see a stock that had already more than doubled for you go on to rise another 14% on an average Wednesday in May. Beats 12% or 2%, or -10%, anyway.
As for the second observation, let's take our time with this one, beginning to get there first by way of asking a question.
Why did @Home rise 14% today?
Of course, the actual reason involves hundreds of factors, and thousands of trades. About 6.4 million shares of the stock changed hands today, worth the sum total of about $922 million. That's 922 million pocorobas, money spent to buy AND sell, motivated by everything from a daytrader's flinching left mouse-button to an industry insider's confident trade (whether buy or sell). And everything in between.
But forced to identify a single reason, to boil this day in @Home history down to its particulars, I would have to select the sudden richness of value seen in cable Internet access. AT&T (NYSE: T) and Comcast (Nasdaq: CMCSK) worked out their differences over acquiring MediaOne (NYSE: UMG), as reported in Fool News, with AT&T getting the uncontested buyout in exchange for cable subscribers sold to Comcast. Each of those cable subscribers is priced at $4,500. Within a few short years, AT&T has gone from being a nothing player in the cable industry to becoming that industry's top dog. That's right, AT&T's announced $54 billion acquisition of MediaOne establishes it as the country's largest cable provider.
How did the Michael-Armstrong-led Ma Bell do this? By acquiring number two TCI, and then acquiring number four MediaOne. AT&T used its stock and its huge size within telecommunications to transfer its leadership into the higher-speed broadband communications platform of cable. It's called aggressiveness -- take-charge leadership. Very impressive.
Cable as a medium has become more and more richly valued as it dawns on the business world and the nation at large that cable is the next logical high-speed upgrade from copper wire.
To answer our question, then, that is why @Home rose 14% today (if one is compelled to select only one reason).
Given this, we are now nearing our second observation. But first, another question:
Just exactly why was @Home stock down this morning, when this exciting news was released even before the market opened?
What did people suddenly see in the afternoon that wasn't already evident in the morning, such that @Home stock went from a red-ink morning to a major gainer, up 14% (creating a daily chart that looks like this)?
The answer is that there is no answer -- no rational, predictable reason why the stock didn't open up and close up. Which finally leads to that aforementioned observation:
Buy and hold.
As Rule-Breaking investors, our mission is to locate good strong companies in emerging industries -- companies that BREAK THE RULES, the important rules -- and hold until (and if) we see something better.
Six months ago, when we purchased @Home, the business media wasn't writing every single day about "broadband" and "cable" and "high-speed Internet access" and acquisition wars. @Home was certainly beginning to pop up on the radar, but nothing like today. It helped, from a personal standpoint, that I had been using cable-modem services for months leading up to our investment, as I wrote about in our original buy report. But from the stock's standpoint, I had already seen this emerging player run up a great deal since its July 1997 initial public offering, doubling from its split-adjusted debut at $25 to over $50. And yet the best investments we make are the ones you can be "late" on. I say "late" in quotation marks because $922 million changed hands today at prices almost triple what we paid.
@Home has indeed been a fine investment for the Rule Breaker Portfolio. If we are to draw a lesson from this success (just as we many times draw lessons from our failures), we should entitle it "Invest in Rule-Breaking Industries."
On pp.135-6 of our 1999 book Rule Breakers, Rule Makers, I pointed out that one can locate new Rule Breakers sometimes by looking at industries, not companies. Often, the game is already well afoot if you locate a truly important, emerging industry, and then study its top dog. Broadband Internet service is a clear example, and if you'd done this work in late 1997, mid-1998, or early 1999, the signs would all the way through have pointed you one place: @Home. In little Dorothy's perspicacious and prophetic words uttered on-screen exactly sixty years ago, "There's no place like @Home."
So this one begin with an industry, and led us to a company. Once there, we found that @Home fulfilled the critical attributes of Rule Breakerdom: It had smart management and good backing, excellent past price appreciation, and a very defensible (sustainable) advantage. Financial industry watchers believed it already overvalued. And, within an important, emerging industry, we saw a developing consumer brand. As Jeff Fischer wrote in last night's Breaker report, "AT&T has a vision to provide voice, data, and video through high-speed Internet cable connections. @Home is the leading brand" (bold mine).
In a very pure way, @Home shares fulfill the strictures of Rule-Breaking investing.
Nota bene, dear Fools: The final word is not yet writ, neither for @Home as a company nor as a Motley Fool investment. Indeed, we're not about to write that final word anytime soon, ourselves. As Catiline wrote today on our @Home message board: "I'm starting to lose count of the number of good signs we are seeing for At Home's future." Our best investments have only come to look more and more attractive, ripening with age.
Foolishly,
David Gardner, May 5, 1999
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