FOOL ON THE HILL
How to Find Boring Stocks

We extinguished the Boring Portfolio in 2000, but not its flame. In the wake of the massive market movements of the last two years, some in the Fool Community have revived the Boring Stocks discussion board to develop investing principles and find snoozer stocks. They are looking for off-the-radar smaller caps in unsexy endeavors. They welcome everyone to join in.

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By Tom Jacobs (TMF Tom9)
February 4, 2002

Have you been bitten by biotech, battered by broadband, or withered by wireless? Or perhaps nastied by networking? New technologies can enable companies to invent or transform industries for great profit, but there are many more losers than winners. Not all investors are suited for the carnival ride. Could this be you?

"I am starting my second life as an investor. In the wake of the tech crash many of us thrill seekers experienced, I have vowed to change my ways. Luckily, my previous transgressions did not inflict severe damage on my investment capital.... In turning over my new leaf, I have started searching for stock of a more boring nature. So, what better place to go than the Boring Stocks folder here at TMF, right?"

This wake up call from TheStamper made The Motley Fool's Boring Stocks discussion board explode with new posts. Clearly, others were starting their second lives as investors. The call attracted me too: I invested way too much money in 1999-2000 in companies using wireless technology to allegedly remake communications -- companies that had cool technology, but lousy balance sheets.

What are boring stocks?
The Motley Fool's Boring Portfolio, now discontinued, began in 1996 through the efforts of Greg Markus, and continued with later managers Dale Wettlauffer and Alex Schay. In the epitaph for the strategy, we wrote that the portfolio's returns were a victim of too-frequent trading, and that "The Bore Port lacked a clear-cut set of principles to guide its decisions, and thus was prone to wander. And so it did, making numerous mistakes, buying poor investments, and selling good ones." 

But something about the evolving strategy apparently appealed to many investors, because TheStamper's call started a great conversation about reworking the Boring Port principles. The goal? A model, working portfolio funded by $100,000 from the estate of the late Uncle Dean, a funeral home accountant whose stamp collection appreciated substantially.

In the Boring Manifesto, or, that is, the Frequently Asked Questions now under revision, we find the four criteria:

1. A Boring Company Has Minimal Analyst Coverage.
2. A Boring Company Earns a Majority Of Its Revenues In A Middle Growth Industry.
3. A Boring Company Earns Revenues In A Small Number Of Industries.
4. A Boring Company Has A History Of Positive Earnings.

And for each criterion, there is a scoring system represented in the number of, yes, "Zzzzzzzs," the cartoon symbol for sleep. Truly boring. According to the draft FAQ, once the Z factor has been determined, more factors appear:

1. Low valuation
2. Positive cash flow
3. Returns on capital are greater than cost of capital
4. Increasing earning growth
5. Dividend rates
6. Low market cap

While the conversation continues about each of the criteria and other factors, a key principle emerging is that undervalued, off-the-radar stocks in non-sexy industries can offer the opportunity for significant expansion of their multiples -- whether price-to-earnings, enterprise value to free cash flow, or your favorite valuation ratio.

This is a work in progress, and looks like it will include jmls's comprehensive prior effort that includes discussion of intrinsic value, economic value added analysis, and a host of other valuation tools. But The Stamper provides the bottom line. He subscribes to one of Greg Markus's original rules to be shouted from the boardtops: "We talk, we study, we argue, we screw up, we celebrate, we learn." Judging from the board's activity, the rule is being honored. 

Some examples
The Boring Stocks discussion board now is concerned more with the principles for boring stock selection. That will clearly take time and effort. But posters are already positing possibles for a pantheon of put-to-sleepers.

easyquanter cites soupmaker Campbell Soup (NYSE: CPB), battery and portable power company Energizer Holdings (NYSE: ENR), and candy and collectibles purveyor Topps (Nasdaq: TOPP). He mentions former tire maker B.F. Goodrich (NYSE: GR), uncertain if its new business in aerospace is too exciting for a boring stock.

schurchill16 lists food service and construction equipment manufacturer Manitowoc (NYSE: MTW) and equipment renter United Rentals (NYSE: URI). Other posters have suggested government shipbuilder and repairer Todd Shipyards (NYSE: TOD) and oilfield pumping unit, power transmission product, and other manufacturer Lufkin Industries (Nasdaq: LUFK).

TheStamper himself cruises in with Winnebago (NYSE: WGO), while brettmarfool mentions Baxter International (NSE: BAX), Dominion Resources (NYSE: D), ExxonMobil (NYSE: XOM), Royal Dutch (NYSE: RD), Salomon Brothers Fund (NYSE: SBF), and Sara Lee (NYSE: SLE). One contributor betrays his sweet tooth with Tootsie Roll (NYSE: TR), Wrigley's (NYSE: WWY), and Hershey's (NYSE: HSY).

Everyone is welcome at the Boring Stocks discussion board, whether you want to contribute your own ideas or learn by lurking. And please don't put off signing up for our Charter Membership in the Fool Community. Right now you can get two years for the price of one -- a low $29.95, or only $1.25 a month. As Alfred E. Neuman used to say about the price of MAD Magazine, "Cheap!"

Have a most Foolish week!

Was there a sports event yesterday? Tom Jacobs (TMF Tom9) owns no shares of companies mentioned in this column, which you'd see in his profile, which honors the The Motley Fool's disclosure policy.