St. Louis, MO (Dec. 11, 1997) -- I am filing my report at noon today due to traveling constraints. At the present time the S&P 500 is off 1.46%, the Nasdaq is down 2.34%, and the Borefolio is in negative territory as well. (Editor's note: The Nasdaq ended down 2.48%, the S&P lost 1.53%, and the Bore Port shed 2.07%). At this writing Borders Group (NYSE: BGP) is the lone winner for the Bore. (Editor's note: this remained true.)
The market is off because of a continued crisis in Korea where the currency was off another 10% today. Retail sales numbers came in below expectations for November which cheered bond investors. This may be a harbinger of bad news for retailers for the holiday shopping season. A sluggish economy is good news for bonds in that it decreases the need for interest rate hikes. Stocks, on the other hand, depend on profits and a sluggish economy is no recipe for profits.
Borefolio stocks in the news today include:
Green Tree Financial (NYSE: GNT), down over $3. The company announced the resignation of its president and COO Robert Potts. He is leaving to "pursue other business interests." Lawrence Coss will assume his duties. The turmoil at the company and the problems of the entire consumer finance sector have weighed heavily on the company.
Tidewater (NYSE: TDW) was the subject of a "sell" recommendation from Duke & Co. Evidently the computers at the firm spit out a set of bad numbers for Tidewater. The report cites weakness in the oil sector in general and heavy institutional ownership and a wave of insider selling at Tidewater in particular. The insider selling at Tidewater has been well known to us. It was discussed in the last Conference Call.
Insider selling is not as reliable an indicator as insider buying but, it can occasionally (for example: Oxford Health Plans) be an indication that insiders are skittish about prospects for the company. In Tidewater's case, it reflects the special circumstances surrounding the CEO's compensation arrangement. We continue to evaluate Tidewater in the context of the oil markets generally and oil prices are up today. Tidewater, on the other hand, is off $1 3/8 at the present time. (Editor again: it closed down $15/16.)
The Borefolio has the dubious distinction of having yet another stock featured in a story about the quality of Wall Street research. In today's Wall Street Journal Oracle is singled out in a story which highlights the declining quality of "sell side" research. Readers may recall that a Forbes article on the same topic featured Oxford Health Plans and Green Tree Financial. These three stocks have wrecked havoc with the Borefolio of late.
Individual investors, and for that matter institutional investors, should be concerned about the quality of earnings forecasts. The Fool ratio, aka the PEG, depends on consensus estimates of analysts for calculation. If the estimates are worthless, so is the PEG. Increasingly studies are showing that analysts miss the mark by a wide margin. In fact, in the book "The Education of a Speculator," the recently bankrupt Victor Niederhoffer states that his studies have shown that buying stocks which are out of favor with analysts will lead to better performance than buying stocks with "strong buy" recommendations. Analysts tend to become overly exuberant on the upside and overly pessimistic on the downside. Several other academic studies have come to the same conclusion.
Where does this leave the individual investor? I think that it tells us that the part of our analysis that relys on analyst estimates should be taken with a grain of salt. While it is tempting to do the "easy" thing and calculate a PEG as a basis for evaluation of a stock, that calculation should not have a primary spot in the analysis.
There are many ways to look at a stock which don't depend on analyst's ideas. In a recent issue of the AAII Journal (a great source for unbiased investing thought) there was a review of Peter Lynch's investing approach. Here is a sampling of some of the things he looks for in a stock which don't depend at all on Wall Street analysis.
- The stock should have a good story, ie. an identifiable reason for putting your hard earned money to work with the particular company.
- Look for earnings stability.
- Compare the stock to its own historical performance. The PE should be at the low end of its historical range. (Geraldine Weiss, of Investment Quality Trends, has made a career out of buying stocks at the high end of their dividend yield curve.)
- Compare the stock to its industry. Try to find stocks selling at a PE below the industry average.
- Look for companies with a strong balance sheet.
- Look for companies that generate a lot of cash. (See the Cash-King Investing Message Folder for more on this idea)
Absolutely none of these characteristics depend on analyst coverage or earnings estimates. If there is one thing that the action in Oxford, Green Tree and Oracle has taught us it is that analyst estimates are just that, estimates. That is worth keeping in mind.
Now, I don't know about all of you, but I am ready for the year-end rally.
Editor's Note: Today the Boring Port sold Oracle at $22 1/16, minus $12 more for commission. The stock was bought in November of 1996 and has lost 32% since then, while Microsoft, for example, has nearly doubled. Buying the number two company in any industry can sometimes hurt, as the Fool port has experienced with 3Com as compared to Cisco.
Stock Change Bid CGO -2 1/8 25.00 BGP +1 31.44 CSL -1 43.63 CSCO -2 5/8 82.69 FCH - 3/16 37.75 GNT -3 1/16 23.94 PMSI --- 13.13 TDW - 15/16 57.56
Day Month Year History BORING -2.07% -3.06% 9.46% 25.96% S&P: -1.53% -2.03% 28.92% 53.62% NASDAQ: -2.38% -4.43% 20.72% 49.72% Rec'd # Security In At Now Change 2/28/96 400 Borders Gr 11.26 31.44 179.29% 8/13/96 200 Carlisle C 26.32 43.63 65.72% 6/26/96 100 Cisco Syst 53.90 82.69 53.41% 3/8/96 400 Prime Medi 10.07 13.13 30.35% 12/23/96 100 Tidewater 46.52 57.56 23.72% 3/5/97 150 Atlas Air 23.06 25.00 8.42% 11/6/97 200 FelCor Sui 37.59 37.75 0.43% 2/2/96 200 Green Tree 30.39 23.94 -21.23% Rec'd # Security In At Value Change 2/28/96 400 Borders Gr 4502.49 12575.00 $8072.51 8/13/96 200 Carlisle C 5264.99 8725.00 $3460.01 6/26/96 100 Cisco Syst 5389.99 8268.75 $2878.76 3/8/96 400 Prime Medi 4027.49 5250.00 $1222.51 12/23/96 100 Tidewater 4652.49 5756.25 $1103.76 3/5/97 150 Atlas Air 3458.74 3750.00 $291.26 11/6/97 200 FelCor Sui 7518.00 7550.00 $32.00 2/2/96 200 Green Tree 6077.49 4787.50 -$1289.99 CASH $6318.47 TOTAL $62980.97