Boring Portfolio

Boring Portfolio Report
Monday, December 29, 1997
by Greg Markus (TMFBoring@aol.com)


ANN ARBOR, Mich. (Dec. 29, 1997) -- The benchmark Nasdaq and S&P 500 averages closed sharply higher in this last week of 1997. The Boring Portfolio had a good day as well, rising 1.7%. Six of eight holdings gained ground, with Atlas Air (NYSE: CGO) and our REIT, FelCor Suite Hotels (NYSE: FCH), slipping fractionally.

Particularly strong were oil services stocks. Tidewater (NYSE: TDW) gained $2 3/8 despite crude oil prices falling to a 1997 low of $17.58 during the day. The Borefolio's other standout was Cisco Systems (Nasdaq: CSCO), up $2 3/4. I found no news of note on either stock.

The Boring Portfolio currently has a bit more than 10% of its total value -- or about $6500 -- sitting in cash. Over the holiday break, Borefolio associate Mark Weaver and I are actively looking for new stocks in which to invest that money.

As always, we're looking for companies that are of very high quality and leaders in their particular fields. More often than not, the companies we favor are ones that are somewhat out of the limelight yet provide products or services that we use or can readily understand. You know: boring.

Companies in which the Borefolio invests must also have demonstrated the ability to grow sales and earnings at rates above that of the S&P 500. We're willing to pay a fair price for such growth, but not more than that. Consequently, not only must the company meet our criteria, the company's stock must also be reasonably valued.

I'm not rigid in my approach to valuation, but usually it involves comparing the stock's projected price-to-earnings (PE) or price-to-cash-flow (PCF) ratio to various benchmarks. Those benchmarks can include the company's historical average, its projected near- and (more often) long-term rate of growth in earnings (or cash flow), and comparable ratios of peer firms.

By way of example, one company I'm currently studying is Newell (NYSE: NWL). A wonderfully Boring company, you may have never heard of Newell, but you probably own or use something it makes.

Got any Levolor, Del Mar, or Riviera blinds in your home or office? That's Newell. How about any pens, pencils or markers with names like Sanford, Eberhard Faber, Berol, Sharpie, Uni-ball, or Mongol (to name just a few)? That's Newell, too. Stuart Hall school supplies? Newell.

Got a Rolodesk on your desk? Yup, Newell. How about a framed picture of the family? Chances are, the frame is a Newell brand -- names like Intercraft, Decorel, Burnes of Boston, Carr, Rarewoods and Terragraphics.

Not to mention Ace combs, Goody hair accessories, Anchor Hocking glassware, Lee Rowan and System Works storage and shelving systems, Mirro and Wearever cookware, Amerock cabinet hardware, Bulldog hardware, EZ Paintr paint applicators, BernzOmatic torches... well, you get the idea.

Newell also owns what used to be the European consumer products business of Corning Inc., including the Pyrex, Pyroflam and Visions product lines in Europe, the Middle East, and Africa.

Newell also owns 6.4 million shares of Black & Decker (NYSE: BDK) common stock and has a 49% ownership interest in American Tool Companies Inc., maker of Vise-Grip locking pliers and Irwin tools.

Founded in 1902 as a maker of curtain rods, Newell's revenues will top $3 billion in 1997. About 15% of sales are to Wal-Mart (NYSE: WMT). But while world-famous Wal-Mart has an operating margin under 6%, unknown Newell's is nearly four-times larger -- right around 21.5% for 1997!

How does Newell manage that? First, through sheer size. Over the years, Newell has put together a manufacturing and distribution operation that covers dozens and dozens of the SKUs ( "shop-keeping units") that places like Wal-mart and Target need.

Beyond that, as the Value Line report on Newell says, "large retailers like dealing with this company." Newell knows what big retailers want, when they want it, and how much they want. The company has a reputation for providing outstanding customer service and innovative marketing programs.

Newell's computerized systems allow it to receive and process customers' orders entirely on an electronic, just-in-time basis. Newell also offers vendor-managed inventory systems, with which the company manages inventory at customer locations.

Newell's stated financial goals are to maintain return on beginning equity (ROE) at 20% or above and increase earnings per share an average of 15% per year, while maintaining a prudent ratio of total debt to capital. The company has achieved these goals over the last ten years, averaging 21% ROE, increasing EPS at a 20% compound annual growth rate and averaging 28% leverage.

At the foundation of the Newell growth strategy is acquisitions. Since the late 1960s, Newell has acquired more than 70 companies. Typically, the acquired companies have unrealized profit potential that blossoms through a process of profit improvement and productivity enhancement referred to as "Newellization." In addition to growth provided through acquisitions, Newell has built a sustainable internal growth momentum averaging 5% annually over the past five years.

In these regards, what Newell does on the consumer products side of things reminds me a lot of what Borefolio holding Carlisle Companies (NYSE: CSL) does on the industrial side.

The story sounds great, but what about the stock? Is that great story already built into the share price, such that the stock's total return is unlikely to beat the market averages in the coming year? If so, then it might make sense to wait a bit before buying.

Newell stock rose $11/16 to close at $42 5/16 today -- not far below its recently established all-time high of $43 13/16. Whether that's still cheap, about fair, or too dear is a matter I'm currently studying. I'll report back soon on what I find out.


TODAY'S NUMBERS
Stock  Change    Bid
CGO   -  1/16  22.06
BGP   +  1/2   30.19
CSL   +  3/16  40.31
CSCO  +2 3/4   55.88
FCH   -  1/8   35.50
GNT   +  3/16  25.06
PMSI  +  5/16  13.00
TDW   +2 3/8   52.00
                   Day   Month    Year  History
        BORING   +1.70%  -6.46%   5.62%  21.54%
        S&P:     +1.81%  -0.21%  28.71%  53.37%
        NASDAQ:  +1.73%  -3.94%  19.09%  47.70%

    Rec'd   #  Security     In At       Now    Change
  2/28/96  400 Borders Gr    11.26     30.19   168.18%
  6/26/96  150 Cisco Syst    35.93     55.88    55.50%
  8/13/96  200 Carlisle C    26.32     40.31    53.13%
   3/8/96  400 Prime Medi    10.07     13.00    29.11%
 12/23/96  100 Tidewater     46.52     52.00    11.77%
   3/5/97  150 Atlas Air     23.06     22.06    -4.32%
  11/6/97  200 FelCor Sui    37.59     35.50    -5.56%
   2/2/96  200 Green Tree    30.39     25.06   -17.52%

    Rec'd   #  Security     In At     Value    Change
  2/28/96  400 Borders Gr  4502.49  12075.00  $7572.51
  6/26/96  150 Cisco Syst  5389.99   8381.25  $2991.26
  8/13/96  200 Carlisle C  5264.99   8062.50  $2797.51
   3/8/96  400 Prime Medi  4027.49   5200.00  $1172.51
 12/23/96  100 Tidewater   4652.49   5200.00   $547.51
   3/5/97  150 Atlas Air   3458.74   3309.38  -$149.37
  11/6/97  200 FelCor Sui  7518.00   7100.00  -$418.00
   2/2/96  200 Green Tree  6077.49   5012.50 -$1064.99

                             CASH   $6427.47
                            TOTAL  $60768.10