Fool's Eye View

[ September 27, 2000 ]

Portfolio Watching (and Weeping)

By Christopher Spink (TMFEagle)

Great Titchfield Street, London -- I worry about the portfolios of individual Fools. In the short term they may have had a tough time. At the end of August we managed to find out the 100 most popular stocks held by people who have set up a portfolio to follow on the Fool. Of course we have no idea whether these are real or notional holdings. Neither do we know how much of each stock in monetary terms is held. But at least the list gives some rough and ready indication of the most popular stocks.

1. (2) Vodafone Group (LSE: VOD)
2. (1) Marks & Spencer (LSE: MKS)
3. (3) British Telecom (LSE: BT.A)
4. (4) Halifax (LSE: HFX)
5. (5) ARM Holdings (LSE: ARM)
6. (6) Lloyds TSB (LSE: LLOY)
7. (9) Baltimore Technologies (LSE: BLM)
8. (8) Abbey National (LSE: ANL)
9. (7) British Airways (LSE: BAY)
10. (11) Psion (LSE: PON)
11. (10) Lastminute.com (LSE: LMC)
12. (12) Tesco (LSE: TSCO)
13. (13) Glaxo Wellcome (LSE: GLXO)
14. (14) ICI (LSE: ICI)
15. (15) Cable & Wireless (LSE: CW.)
16. (16) Freeserve (LSE: FRE)
17. (18) Centrica (LSE: CNA)
18. (17) Royal & Sun Alliance (LSE: RSA)
19. (22) Woolwich (LSE: WWH)
20. (24) Boots (LSE: BOOT)

(The figure in brackets shows the stock's position in the Fool charts at the end of June)

What worries me is that virtually all of the top 20 most popular stocks are trading at substantial discounts to their all-time highs. That's not so surprising, since the FTSE 100 has fallen 9% so far this year. However, the most popular stocks have subsided substantially more than the index since January 1999.

Vodafone (LSE: VOD), Marks & Spencer (LSE: MKS) and British Telecom (LSE: BT.A) are far more popular amongst Fools than other companies. All three, though, are currently showing declines of more than a third from their high water marks.

Vodafone has fallen 36% from its high of 399p, attained in early March. Worries about the costs of rolling out the next generation of mobile phones have affected it badly. M&S stands at 210p, 37% below this year's high and two-thirds below its peak of 633p, reached in September 1997. Meanwhile BT has lost half its market value this year.

In fact the rest of this Motley crowd haven't performed too well either. Of the top 20 Foolish stocks, only Tesco (LSE: TSCO) currently trades at an all-time high. Here is a list of the discounts the top 20 stocks currently trade at to their high point since January 1999.

Freeserve 73%
Lastminute.com 71%
ICI 56%
Marks & Spencer 54%
Boots 51%
BT 51%
Baltimore 50%
British Airways 46%
Psion 46%
Lloyds TSB 43%
Halifax 40%
Abbey National 39%
Cable & Wireless 36%
Vodafone 36%
Royal & Sun All. 28%
Arm 24%
Centrica 18%
Woolwich 14%
Glaxo 13%
Tesco 0%

So over a third have fallen by more than a half from their highs of the past 20 months. Three of these, Baltimore (LSE: BLM), Freeserve (LSE: FRE) and Lastminute.com (LSE: LMC) heavily rely on consumers using the Internet for their revenue. All three reached fantastic highs this March before the Nasdaq fell, pulling down everything in its wake.

The other casualties, ICI (LSE: ICI), Marks & Spencer, Boots (LSE: BOOT) and BT (LSE: BT.A) may suffer from more serious afflictions. M&S and Boots are both retailers coming to terms with consumers demanding permanently low prices. The telecom regulator Oftel is crucifying BT, insisting it open up its dominant position in domestic fixed line connections to competitors. And ICI has been hit by the rising oil price.

The next seven companies in the list, all of which have fallen by a third or more from their highs, again make up a mix of old and new economy companies. Psion (LSE: PON), Cable & Wireless (LSE: CW.) and Vodafone have all taken a tumble since March in line with many technology, telecom and media shares.

The market reckons banking margins will suffer from the transparency that the Internet will give customers. Thus Lloyds TSB (LSE: LLOY), Halifax (LSE: HFX) and Abbey National (LSE: ANL) have all dropped in value. That leaves British Airways (LSE: BAY). The group is also suffering from price competition. The advent of budget airlines offering lower prices has undercut BA's business and eroded its margins.

So what, Fool?

What lessons can one draw from this hindsight gaze? I know it's easy in retrospect but the hardest thing in the world is selling shares. Investors should only really do so if they feel something fundamental has changed about the company's business. This has happened to banks, retailers and telecom companies, all of which face an era of reduced margins.

Also, I would suggest that valuation does matter. The valuations given to trendy TMT companies in February and March were hugely inflated with hype and hope. Underneath though their businesses have changed less than the group mentioned in the paragraph above. Do those with decent products, businesses and potential, now represent something of a bargain?

Where Next?

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