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AT&T: Quintessential Foolish Four Stock

AT&T's current metamorphosis, and the resulting complexity of the company, make it a classic Foolish Four stock. Those investors holding it for one year as part of a mechanical strategy may benefit from a potential turnaround in the company's fortunes, or from possible spin-offs and divestitures. While there's no certain outcome, AT&T did quite well during its previous stint as a Foolish Four stock.

By Chris Rugaber (TMF RFK) (TMF RFK)
August 25, 2000

Some stocks are just made for the Foolish Four. When a company is difficult to evaluate, in the midst of a dramatic transformation of its business, with a murky future, many investors will steer clear. And they're probably right to do so, given that future financial projections are difficult, and even general assumptions about the direction of the company are hard to make.

On the other hand, the company may turn around. The transformation may succeed. If so, while others miss out, a Foolish Four investor will benefit, by using a mechanical system to buy into the company at the depth of its troubles, and then reap the benefits as things rebound.

That's at least one possible scenario for AT&T (NYSE: T), a company that has entered the Foolish Four in the past and is smack dab in the middle of it now. While still the country's undisputed long-distance cham-peen, ol' Ma Bell is now the largest cable operator in the country as well, and hopes to use its cable lines to get back into the local phone business, and expand into the digital cable TV and high-speed Internet access businesses. In short, this is not your father's AT&T.

A cloudy future
It's also not the easiest company in the world to understand, to say the least. AT&T's many sprawling business divisions, complicated financial statements resulting from multiple recent acquisitions, and complex technologies defy easy analysis. The company faces multiple competitors on several different fronts, from Baby Bell companies such as Verizon Communications (NYSE: VZ) and SBC Communications (NYSE: SBC) attacking its long-distance business in New York and Texas, respectively, to rivals such as Worldcom (Nasdaq: WCOM) and Qwest Communications Int'l (NYSE: Q) going after its business data customers.

More importantly, the company still must prove the viability of the strategy it has followed since current CEO Michael Armstrong took over in October 1997. AT&T has spent almost $100 billion on its nationwide cable properties, and is more than $56 billion in debt as a result.

In the most recent quarter, the company doubled its cable telephony customers sequentially, and its Excite@Home (Nasdaq: ATHM) subsidiary recently passed the 2-million subscriber mark. Nevertheless, as discussed in a recent Fool News article, these initiatives are having a hard time making up for the decline in consumer long-distance revenues, which was 9% in the most recent quarter, costing the company $495 million in sales.

However, if you own shares of AT&T as part of your Foolish Four strategy, you at least know your exit strategy, and are relatively free from agonizing over many of these issues. In addition to a clear turnaround in the company's prospects, there are several ways current shareholders could benefit from holding the company.

A repeat performance?
AT&T had a pretty good run as a Foolish Four company once before. In fact, the Rule Breaker portfolio -- back when it was just the plain ol' Fool Portfolio -- ended up with shares of AT&T from mid-1996 through early 1999, when it included Foolish Four stocks in its holdings.

The company did well for the Rule Breaker, returning about 141% over the two-and-a-half years it was part of the portfolio. In addition, the Rule Breaker benefited from a couple of spin-offs -- primarily Lucent Technologies (NYSE: LU), shares of which more than quadrupled for the Rule Breaker.

While I certainly won't predict a repeat performance for any investor who has recently bought AT&T shares as part of their Foolish Four portfolio, there are some potential similarities, beginning with spin-offs. The company currently holds about 85% of AT&T Corp. Wireless Group (NYSE: AWE), the third-largest wireless provider in the U.S., and plans to distribute the rest to shareholders this year and next.

In addition, there have been plenty of rumors about other spin-offs, tracking stocks, and divestitures. Some of the rumors are less likely than others, of course, but analysts have estimated AT&T's various divisions being worth anywhere from $45 to $73 per share, when valued as individual businesses, as discussed in this Fool news article.

None of this is to dismiss the company's prospects in its current form. Indeed, I would argue that AT&T should avoid selling off too many assets before its current strategy has a chance to work. But then, that's another benefit of the Foolish Four: large Dow companies can be worth quite a bit, even if they're breaking apart.

Fun & Folly: Fool Survivor
Finally, what do Maria Bartiromo, Richard Branson, and David Bowie have in common? They're castaways in Fool Survivor, of course. The TV show may be over, but you can still have some fun and walk away with $2000, a Handspring Visor, or one of many other prizes. Head on over to our Fun & Folly area for more details on how you can win!

Related Links:
AT&T Turns Around Slowly, Fool News, 7/25/00
AT&T Under Pressure, Fool Plate Special, 8/11/00
Excite@Home @ the 2 Million Mark, Fool News, 8/22/00

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