Boring Portfolio

Boring Portfolio Report
Tuesday, November 12, 1996

by Greg Markus (MF Boring)

ANN ARBOR, Mich., November 12, 1996 -- After a down and up day, the Dow managed to add another 10 points to yesterday's record high. The S&P 500 and the Nasdaq each lost ground, however -- a rather unusual event recently. The S&P slipped 0.32%. The Naz was off 0.48%, as chip stocks did the "buy on the rumor, sell on the news" routine. Trading was very active on both the Big Board and the Nasdaq.

The Boring Portfolio dipped a quarter percentage-point in net value on Tuesday, also. Cisco returned some of its recent gains as the entire networking group was hit by a bout of profit-taking. Percentage-wise, the Borefolio's big dipper was Prime Medical, which continued to wilt under relentless selling pressure. PMSI will be the focus of most of tonight's Borefolio recap.

On the upside, Oxford Health maintained its, well, health -- adding $1 3/4 to close just below its all-time high. Solectron quietly tacked on $1 1/8 to attain yet another record of its own. Borders Group booked a half-buck gain on twice the stock's average trading volume in advance of the company's quarterly report, expected later this week.

Okay, so what's the deal with PMSI? With today's loss of $3/4 (on above-average volume) the stock has round-tripped to where it stood in early March, after hitting the $20 mark in June.

First, let's recall what Prime Medical does. The Company is the largest and one of the fastest growing providers of lithotripsy services in the U.S., providing services at approximately 400 hospitals and surgery centers in 31 states. Lithotripsy is a non-invasive procedure for the treatment of kidney stones. PMSI's lithotripters performed approximately 17% of the estimated 180,000 lithotripsy procedures performed in the U.S. in 1995.

As folks who follow the stock know, PMSI's share price faltered after the company announced a much misunderstood secondary stock offering timed inopportunely to coincide precisely with the summer market slump. The company delayed and then ultimately canceled the offering entirely. The stock recovered a bit, but then began dropping again. Through it all, the company posted analyst-beating revenues and earnings for both the second and third quarters.

Analysts continue to rate the stock highly ("strong buy" to "buy") and forecast annual EPS growth (adjusted for taxes) in the 20-30% range for at least the next three years. Yet today, at a bid of $10 1/4, the stock is going for less than 14-times estimated 1997 EPS.

Hello?

One theory is that a slightly lower profit margin in Q3 may have spooked some traders. It shouldn't have: the recently acquired Litho, Inc. operations have smaller margins that the old PMSI, because Litho, Inc. owned a smaller share of the stone-busting businesses in which it had interests than the old PMSI did in its operations.

I've also heard some speculation that because another major (and failing) operator of lithotripters, Coram Health, is about to be acquired (by Integrated Health Services, which is not exactly in great shape itself), this may have disappointed traders who were expecting PMSI to buy Coram at some point. But as one analyst who closely follows PMSI and its competitors told me today, Coram's inflated asking price had made it an unlikely acquisition for PMSI; and Coram presents no serious competitive threat to PMSI in any event.

I also spoke with PMSI's CFO, Cheryl Williams, today. She told me that there is absolutely no change in Prime Medical's business. Everything's on track, and they are comfortable with analysts' earnings projections. In a nutshell, there's no news. What she's heard -- and what an analyst and a participant in the PMSI folder have also told me -- is that a well-known momentum stock investor who had acquired more than a million shares of PMSI has been selling lately based entirely on the short-term loss of momentum in the stock.

No doubt, it's disturbing to watch a stock lose a good portion of its value over the course of a few months. It's one thing if the drop is attributable to some material change in the underlying business. It's something else if it's due to momentum investors leaping in and out of a stock, however -- or at least it's something else to me.

I have no idea whether the selling has pretty much run its course or not. For one thing, there are some 2.26 million PMSI shares registered for sale; these are shares that some docs received as partial payment for their stone busters that PMSI acquired from them. I understand that most (but not all) of those shares remain unsold. I'm uninterested in catching any falling knives (or lithotripters) at the moment. Eventually, though, the selling will exhaust itself -- and possibly soon. When it does, the stock will represent an unusually fine value, in my opinion.

Transmitted: 11/12/96


TODAY'S NUMBERS
Stock  Change    Bid
--------------------
BGP   +  1/2   35.75
CSL   -  3/8   54.75
CSCO  -1 1/2   64.88
GNT   -  1/4   39.75
OXHP  +1 3/4   54.00
PMSI  -  3/4   10.25
SLR   +1 1/8   58.13
                   Day   Month    Year  History
        BORING   -0.26%   2.98%  15.62%  15.62%
        S&P 500  -0.32%   3.44%  17.36%  17.36%
        NASDAQ   -0.48%   2.87%  20.71%  20.71%

    Rec'd   #  Security     In At       Now    Change

  2/28/96  200 Borders Gr    22.51     35.75    58.80%
   2/2/96  200 Green Tree    30.39     39.75    30.81%
  6/26/96  100 Cisco Syst    53.90     64.88    20.36%
  5/24/96  100 Oxford Hea    48.02     54.00    12.44%
 10/15/96  100 Solectron     54.52     58.13     6.60%
  8/13/96  100 Carlisle C    52.65     54.75     3.99%
   3/8/96  400 Prime Medi    10.07     10.25     1.80%



    Rec'd   #  Security     In At     Value    Change

  2/28/96  200 Borders Gr  4502.49   7150.00  $2647.51
   2/2/96  200 Green Tree  6077.49   7950.00  $1872.51
  6/26/96  100 Cisco Syst  5389.99   6487.50  $1097.51
  5/24/96  100 Oxford Hea  4802.49   5400.00   $597.51
 10/15/96  100 Solectron   5452.49   5812.50   $360.01
  8/13/96  100 Carlisle C  5264.99   5475.00   $210.01
   3/8/96  400 Prime Medi  4027.49   4100.00    $72.51


                             CASH  $15435.93
                            TOTAL  $57810.93



Transmitted: 11/12/96


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