Boring Portfolio

Boring Portfolio Report
Wednesday, December 31, 1997
by Greg Markus (TMFBoring@aol.com)


ANN ARBOR, Mich. (Dec. 31, 1997) -- The Boring Portfolio picked up 0.55% on this last day of 1997. The benchmark averages closed mixed, with the Nasdaq up 0.34% but the Dow and S&P 500 closing nominally lower.

On the sea, Tidewater (NYSE: TDW) marked the end of the year by rising $2 13/16. Oil stocks, which have rebounded in the past few trading sessions, may have been helped by an item in today's Wall Street Journal. The story in that paper reported that insiders at a number of energy services companies have been buying their companies' shares during the year-end slump.

In the air, Atlas Air (NYSE: CGO) ascended $1/2 to $24. Earlier this month, Atlas had succumbed to a bout of the Asian flu. The stock has recovered the past few days, perhaps as traders come to realize that weaker Asian currencies are likely to mean increased exports from Asia next year -- which would translate into continued strong demand for Atlas's bulk-cargo lift capacity.

With today's advance, the Borefolio ends the year with a net gain of 9.35%. That's better than a poke in the eye with a sharp stick, but it pales in comparison with the yearly gains of 21.64% and 31.01% for the Nasdaq and S&P 500, respectively.

Although it seems like ages ago now, as recently as mid-October the Borefolio was showing a year-to-date gain in excess of 31% and topping the S&P 500. Alas, much of those gains were obliterated as the Borefolio had not one, not two, but three horses shot out from under it in rapid succession.

Oxford Health Plans (Nasdaq: OXHP), Green Tree Financial (NYSE: GNT), and Oracle Corp. (Nasdaq: ORCL): the Borefolio hit the trifecta from hell in the last quarter of 1997.

First, Oxford Health Plans stunned analysts and investors alike when, with an exquisite sense of timing, the company chose Gray Monday, Oct. 27, to let the world know that, in effect, Oxford's financial managers had only the roughest of ideas about how much money the company had been taking in and paying out... all year long. Oxford's stock toppled nearly $43 into the mid-$20s.

The Borefolio promptly sold its interest in Oxford, but not until seeing 12% of the portfolio's net asset value disappear in a matter of hours on that fateful day. Stockholders who hung on to OXHP, believing they had hit the basement, soon discovered a sub-basement and lower parking level beneath.

The stock sits today in the mid-teens, a dark star in a ebon sky, where once a blazing beacon shone. Or whatever.

Less than three weeks later, Green Tree Financial, the once mighty sequoia of the financial services industry, transformed itself into a tabletop bonsai faster than you can say "gain on sale."

As with Oxford, an accounting problem did in Green Tree: the company had failed to adequately manage prepayments of manufactured home loans, and it was stuck with taking a charge of $125 million to $150 million, pretax, to reflect the reduced value of those loans. The prepayments occurred as interest rates plummeted and upstart buccaneers enticed Green Tree's customers away with lowball refinancing rates.

Soon after this news hit, Green Tree's President and Chief Operating Officer, Robert Potts, walked the plank, and the stock took another dive. After sinking briefly into the teens -- from a recently established all-time high of $50 1/4 -- GNT has sprouted back to its current $26 1/4.

The Borefolio has held on to its Green Tree stock. We share some of the misgivings about the inherent risks of gain-on-sale accounting -- in which "earnings" are booked based on an estimate of future cash flows accruing from securitized loan pools -- but we believe that (a) the sell-off in the stock of this highly experienced and reputable company was far overdone, and (b) Green Tree's management has learned an expensive lesson and will work diligently to avoid another costly mis-step.

Indeed, the latest readings on Green Tree's loan portfolio performance suggest that prepayments are under much better control.

Although Green Tree stock has worked back up from its recent lows, what was once a sizably profitable investment for the Borefolio is now a four-figure loss heading into 1998.

But wait! There's more! Three weeks after the Green Tree chainsaw massacre, the Borefolio took its third hit. Oracle shocked Wall Street by missing its fiscal second-quarter sales and earnings numbers.

Worse, in the follow-up conference call, management floundered for reasons to expect any improvement soon in the single-digit annual growth in license revenues from Oracle's core database products and its vitally important applications line.

We sold our 150 shares of Oracle on Dec. 11 at a split-adjusted price of $22 1/16 per share, suffering our third sizable loss in a span of less than seven weeks. The stock has remained in the low $20s since then.

Has anything good come from this experience? We think so.

Beyond providing witnesses to the Borefolio's decimation with a bit of the same perverse entertainment value afforded gawkers at a multi-vehicle pile-up, we think some useful lessons may be learned from it all.

For one thing, we've reaped a vivid lesson regarding the questionable value of "research" provided by sell-side analysts.

As my Borefolio teammate, Mark Weaver, MD, pointed out in a recent recap, individual investors --and institutional investors, too, for that matter -- should be concerned about the quality of the earnings forecasts those analysts provide. The Fool ratio, aka the PEG, depends on consensus estimates of analysts for calculation. If the estimates are dubious, so is the PEG. Garbage in, garbage out.

Where does this leave the individual investor? First, it means doing more of one's own homework rather than relying overly much on that of the analysts. Read what they provide, to be sure; but don't stop there. Read the company's SEC filings, call the company up and ask questions, including pointed ones if you have them.

If I had relied a bit less on analysts' stories and earnings forecasts for Oracle and a bit more on what my own homework and personal experience with the company had unearthed, I may well have managed to sidestep the brunt of that stock's implosion.

I'd seen numerous warning signs in trade journals that the new Oracle8 database was slow in catching on. And I had almost no luck prying loose information from the company's investor relations department. Four days before Oracle reported its quarterly shortfall, I posted the following message in the Oracle folder at The Motley Fool's site on AOL:

<<Look, Oracle's been hurt all year by the strong dollar; more than half their revenues come from outside the US. And core database sales were anemic last Q. And the transition to NT from UNIX crimps margins. And the apps business has to deal with Peoplesoft, Baan, SAP, and other solid, aggressive companies. And there have reportedly been some recent defections in middle-mgmnt and sales. And new tools were slow in coming. And Ellison's been off on a walkabout with the NC. And... what have I missed?>>

I take no pleasure in prophesying Oracle's problems. Talk without action means little, and I failed to act.

Another lesson, learned well by this Fool, is to pay even closer attention to the commentaries provided by knowledgeable contributors to The Motley Fool's message boards. Had we done that, it would probably have saved us from the Oxford Health disaster.

Consider, for example, that Stuart Levy, MD, practically pleaded with us repeatedly to take notice that Oxford was still way behind on paying claims in early October, regardless of whatever propaganda the company was putting out.

On Oct. 9 -- more than two weeks before Gray Monday -- Dr. Levy wrote in TMF's Oxford Health folder (on AOL):

<<OXHP still owes my Anesthesiology group in New Jersey close to $1/2 million. Surgeons have the same gripe. They owe my hospital over $3 million.

There has to be a reason for their willingness to absorb our threats of a lawsuit against them. I suspect we'll find that reason in due time. And when they finally pay this debt to us, their quarter is not going to look very pretty. I wouldn't touch the stock now.>>

Dr. Levy, you were right and I was wrong. Thanks for trying to warn us.

So much for looking back at 1997. In a few hours, the new year breaks. On Friday, I'll offer some forward-looking thoughts -- on what I'm expecting from the current Boring companies in 1998 and what new stocks we may be adding.

Here's wishing you a peaceful and prosperous New Year. Oh, one other thing...

GO BLUE!


TODAY'S NUMBERS
Stock  Change    Bid
CGO   +  1/2   24.00
BGP   +  5/16  31.31
CSL   -  1/16  42.75
CSCO  -  9/16  55.75
FCH   -  1/2   36.00
GNT   -  5/16  26.19
PMSI  +  3/8   13.75
TDW   +2 9/16  55.13
                   Day   Month    Year  History
        BORING   +0.55%  -3.16%   9.35%  25.83%
        S&P:     -0.04%   1.57%  31.01%  56.11%
        NASDAQ:  +0.34%  -1.89%  21.64%  50.86%

    Rec'd   #  Security     In At       Now    Change
  2/28/96  400 Borders Gr    11.26     31.31   178.18%
  8/13/96  200 Carlisle C    26.32     42.75    62.39%
  6/26/96  150 Cisco Syst    35.93     55.75    55.15%
   3/8/96  400 Prime Medi    10.07     13.75    36.56%
 12/23/96  100 Tidewater     46.52     55.13    18.48%
   3/5/97  150 Atlas Air     23.06     24.00     4.08%
  11/6/97  200 FelCor Sui    37.59     36.00    -4.23%
   2/2/96  200 Green Tree    30.39     26.19   -13.82%

    Rec'd   #  Security     In At     Value    Change
  2/28/96  400 Borders Gr  4502.49  12525.00  $8022.51
  8/13/96  200 Carlisle C  5264.99   8550.00  $3285.01
  6/26/96  150 Cisco Syst  5389.99   8362.50  $2972.51
   3/8/96  400 Prime Medi  4027.49   5500.00  $1472.51
 12/23/96  100 Tidewater   4652.49   5512.50   $860.01
   3/5/97  150 Atlas Air   3458.74   3600.00   $141.26
  11/6/97  200 FelCor Sui  7518.00   7200.00  -$318.00
   2/2/96  200 Green Tree  6077.49   5237.50  -$839.99

                             CASH   $6427.47
                            TOTAL  $62914.97