The Boring Portfolio

ANN ARBOR, MI, June 20, 1996 -- So far, June has definitely been one of those months that provide investors with a good indication of what their tolerance for risk is.

It's no problem being a go-go stock tycoon when the markets are ratcheting up inexorably. We're all brilliant stock-pickers, thinking about trading in our day jobs for a life of issuing "buys" and "sells" from a cellular phone and a laptop in Kauai. That image tends to lose focus a bit as the fractions are falling off our stocks with each passing day -- or even hour!

Today, the Boring Portfolio lost ANOTHER one and a half percentage points in value, and for the month so far, the Borefolio has shed 5.74%. Yow! It is cant comfort to know that the NASDAQ has lost even more in June -- over 6%. Indeed, less than $300 of the Borefolio's gains since inception in late January remain -- not counting accumulated dividends and interest for the past quarter (which will get tallied in at the end of the month). So in a sense, the Borefolio gets to start over again, less than five months after it acquired its first stocks. So be it.

Thursday's session was a rough one, no doubt about it. Shortly after 1PM EDT today (just as MF Rigs was turning into my driveway to pick me up for lunch at the Zanzibar, right around the corner from the "Mother Church" Borders here in Ann Arbor) the NASDAQ was down ANOTHER 25 points. At that brief moment in time, the NASDAQ average was down 96 points from the record high it had reached only 11 sessions ago (on June 5). Folks, that's 7.7% correction! The NASDAQ managed to recover a fair chunk of lost ground in the late afternoon, but still closed down more than 11 points in its sixth straight losing session. (The S&P 500 managed a minuscule gain on the day, but is still in the hole for the month to date.)

Pretty amazing, right? Well actually, it's not amazing at all. Such corrections--even bigger ones--are entirely normal. If anything, what's amazing is that we've managed to avoid a comparable adjustment for so long. They happen. And when they are done, they present terrific opportunities to snap up high quality stocks at bargain prices. Stocks like those in the Boring Portfolio right now, for example.

Our top three holdings, Prime Medical, Borders Group, and Texas Industries, have amply demonstrated their value to the Borefolio. But what about the four current holdings that have performed less well to date?

Let's start with Green Tree Financial. Well, a special section in today's Wall Street Journal detailed that paper's 1996 "All Star Analysts Survey." Last year's top picker in the "Brokerage in Finance Group," and this year's third place winner (with a 94% return, no less) is Steven Eisman of Oppenheimer. Among Eisman's top picks last year: Green Tree Financial. And what does he like this year? Uh-huh, GNT.

How about Oxford Health Plans? I added OXHP late last month and it's showed its gratitude by losing more than 17% in value already. What gives -- other than OXHP's share price, that is? Well, a few other HMOs have issued warnings recently about problems of one sort or another that they are experiencing. Today's sob-story came from St. Louis-based RightCHOICE. RightCHOICE noted "softer pricing" and higher patient utilization of services as reasons for its drooping profits. As for OXHP, it has indicated nothing of the sort. To the contrary, management has expressed "comfort" with analysts' earnings projections, and the news continues to roll in about Oxford's high-quality service (see the current Newsweek cover story) and the prowess of the stock (see the winning hospital/HMO analysts' recommendations in the aforementioned WSJ survey).

Or The Shaw Group, which has lost over 13% to date for the Borefolio? As noted in the Borefolio recap recently, Shaw Group is "very, ... completely comfortable" with even the high-end of analyst earnings forecasts and intends to show us its winning hand on July 1 before the market opens. As for today, the company issued a press release noting that it has received project commitments totaling $21 million to cover the pipe fabrication for two base chemical plants in South America and one specialty chemical plant in the southern United States.

The press release went on to state that "The international markets continue to provide an abundance of opportunity for Shaw and our proposal activity for overseas contracts remains at healthy levels. Our state-of-the-art bending capabilities provide us with an advantage over most of our competitors, especially when there is an aggressive deadline for bringing a facility on-line sooner. On the domestic front, bidding for refinery/petrochemical work continues active and the rebound in the chemical sector is showing no signs of a slow down." SHAW was our sole gainer on the day, rising $ 7/8 to close at a bid of $16 1/4.

You get the point, I trust. If I had the Borefolio to begin anew -- and in a very real sense, I do -- I'd be very hard-pressed to come up with any better selections than the ones I have right now.

Does that even hold true for LCSI, our cellar-dweller that has lost nearly half its value since late March? My honest answer is: Probably. The truth of the matter is that because of its small size and its (not unreasonably) conservative approach to divulging information about specifics of the business, it's been more difficult than usual for me to offer you (or myself) a confident statement about where I see LCSI going over the remainder of this year.

As I noted last night, my best point-estimate of LCSI's EPS for the fiscal year ending in September is $1.50. The low end of my range of plausible outcomes is $1.35, and the high end is $1.65. Even using the lowball estimate, the stock is trading at only 10X EPS. So I don't see any particular reason to rush to judgment on LCSI: remaining down-side risk appears quite limited, while upside potential is appreciable.

That said, I really do wish that the LCSI insiders could hold off on their relentless selling (again, however unrelated it is to the business's prospects) until the stock recovers a bit. Indeed, some companies have been known to consider share buybacks or other ways of enhancing shareholder value when they find themselves in comparable circumstances. I also think it wouldn't hurt for the company to be more forthcoming with information to its shareholders about where the company sees it greatest prospects and challenges -- and what it intends to do about both. Be that as it may, The Borefolio continues to hold LCSI -- right along with its other six gems.

Missed Wednesday's Boring Portfolio Report? Click HERE