Boring Portfolio

Boring Portfolio Report
Tuesday, April 9, 1996

By Bob Lukas (MF Dogwind)

ANN ARBOR, MI, April 9, 1996 -- All in all, it was a pretty good day for the Borefolio: four stocks up, one down and one unchanged, to outperform all the major averages.

Today's four winners illustrated the proposition that one can find good stocks in virtually any industry. Those winners included shares of a medical company (Prime Medical Services), a retailer (Border's), a building materials outfit (Texas Industries), and a semiconductor equipment supplier (Lam Research).

Our lone loser was Green Tree Financial, which continued to suffer along with other interest-rate sensitive issues in the aftermath of the strong employment numbers reported last Friday. In anticipation of your questions, I called John Dolphin in Green Tree's Investor Relations office this afternoon to try to gain some insight into what might lie ahead for the company in an environment of rising interest rates. (And before you even start, please spare us any lame wisecracks regarding arboreal cetaceans.)

As Mr. Dolphin noted, rising rates tend to shrink the total pie for all lenders, as total demand for loans drops. To a lesser degree, a rising rate environment also pinches Green Tree's profits as the spread decreases between the rate charged to customers on any given day and the rate at which the securitized debt is sold, later in the month. Green Tree has raised rates twice in the past 30 days to mitigate the spread shrinkage.

At the same time, however, Green Tree's niche in the manufactured home market tends to translate into a larger share of the shrinking pie for the company when rates back up. That occurs because rising loan rates tend to make the cost of ownership for manufactured homes comparatively more attractive than that for conventionally-built homes, especially among moderate-income buyers. (The typical mortgage loan for a manufactured home is in the $30,000 to $40,000 range, according to Mr. Dolphin.)

Moreover, recall the reason for the rising interest rates: more employment. Rising employment -- particularly employment growth in the more modest-paying service sector -- is definitely good news for the manufactured homes business. One-third of all new homes sold last year in the U.S. were manufactured ones, by the way.

So what's the net effect? Alas, there is no all-purpose answer; it depends on the absolute level of interest rates, rate velocity, the magnitude of the off-set due to employment gains, and who knows what else. We'll get a better idea pretty soon, however, as Green Tree will be reporting earnings early next Tuesday. I will be participating in the follow-up teleconference and will report back here.

By the way, First Call's latest EPS estimates were uploaded today to AOL, and they show that analysts expect GNT to make $0.47 per share for the quarter just ended, which would constitute a 27% increase over last year's corresponding quarter. Consensus estimates for the full fiscal year ending in December 1996 were increased by two pennies (to $2.18), and EPS estimates for FY1997 were increased by four cents (to $2.78). I can live with that.

Oh, one last thing: Fool HQ tells me that they will be adding accumulated dividends and interest to the Boring Portfolio's balance shortly. Those gains (which have not been added in here since the Borefolio began in January) will put us a percentage-point or so over the break-even mark, even with transaction costs factored in.

Here's to a stronger performance in the second quarter of 1996. How fitting that our first full calendar quarter should have begun on April Fool's Day!

Transmitted: 4/9/96

BGP +   5/8 ...GNT -1  3/8 ...LRCX +1 
...LCSI --- ...PMSI +   5/8 ...TXI +   3/4 ...
                   Day   Month    Year  History
        BORING   +0.56%   0.48%  -1.06%  -1.06%
        S&P 500  -0.32%  -0.51%   3.31%   3.31%
        NASDAQ   +0.31%   0.71%   6.55%   6.55%
    Rec'd  #   Security     In At       Now    Change
   3/8/96 400 Prime Medic    10.07     13.63    35.30%
  2/28/96 200 Borders Gro    22.51     28.00    24.39%
  1/29/96 100 Texas Indus    54.52     66.75    22.42%
   2/2/96 200 Green Tree     30.39     32.38     6.54%
  3/25/96 200 LCS Industr    26.14     21.50   -17.75%
  2/23/96 100 Lam Researc    48.02     38.50   -19.83%
    Rec'd  #   Security      Cost     Value    Change
  2/28/96 200 Borders Gro  4502.49   5600.00  $1097.51
   2/2/96 200 Green Tree   6077.49   6475.00   $397.51
  3/25/96 200 LCS Industr  5227.49   4300.00  -$927.49
  2/23/96 100 Lam Researc  4802.49   3850.00  -$952.49
   3/8/96 400 Prime Medic  4027.49   5450.00  $1422.51
  1/29/96 100 Texas Indus  5449.99   6675.00  $1225.01
                             CASH  $17117.60
                            TOTAL  $49467.60