Boring Portfolio Report
Thursday, June 12, 1997
by Greg Markus (TMF
Boring)
ANN ARBOR, Mich. (June 12, 1997) -- The Boring Portfolio reverted to its contrary ways Thursday, falling nearly a full percentage point in value as the Dow and S&P 500 wafted ever upwards to yet another set of all-time highs. The Dow, rising 135 points, waved bye-bye to the 7600 level and then, not long thereafter, saw the 7700 mark recede in the rear-view mirror.
Semper exuberans! (Sed irrationalis?)
The party was noticeably more subdued on the Nasdaq (+0.25%) as a number of key technology issues lost ground. Continuing the contrarian theme, the Borefolio tech-team of CISCO SYSTEMS (Nasdaq: CSCO) and ORACLE CORP. (Nasdaq: ORCL) were our sole winners today -- Cisco eking out a $1/16 gain while Oracle rose $15/16. Oracle is slated to report results for its fiscal third quarter next Thursday.
Another four-letter issue, PRIME MEDICAL SERVICES (Nasdaq: PMSI) finished unchanged at a bid of $11 5/8.
"Profit-taking" -- along with a Commerce Department report showing retail sales declining in May for the third straight month -- are handy explanations for the $3/4 decline in shares of BORDERS GROUP (NYSE: BGP).
The strong runups recently in ATLAS AIR (Nasdaq: ATLS), CARLISLE (NYSE: CSL), and OXFORD HEALTH PLANS (Nasdaq: OXHP) may have inspired some profit-taking in those issues today, also. I could find no other news relating to those stocks.
Yesterday, analyst Charles Boorady at Prudential Securities initiated his coverage of Oxford with a "buy" rating and a 12 month price target of $83 a share. Boorady is looking for the company to earn $1.85 a share in 1997 and $2.50 a share in 1998. Those estimates are a couple of pennies ahead of consensus projections, according to First Call's survey of analysts; but they're well within the range. Tacking a 33-ish multiple (in line with Oxford's EPS growth rate) onto Boorady's $2.50 forecast yields... $83. Voila!
Profit-taking cannot be dragged on-stage to explain away today's declines in shares of GREEN TREE FINANCIAL (NYSE: GNT) and TIDEWATER (NYSE: TDW), however.
Wednesday's Borefolio recap focused on Tidewater (which sank $1 3/8 today). I'll have more to say about that stock next week. I close tonight's commentary with a few thoughts about Green Tree.
GNT has recovered well from a brief visit to the upper-$20s earlier this spring. The stock is still well off its highs, however. And today it failed to participate in a rally in financial services stocks that was inspired by moderating interest rates.
Hanging over Green Tree most immediately is a story in the current issue of a monthly investment magazine in which David Tice, manager of the so-called Prudent Bear Fund, opines that fair value for GNT is maybe $15.
Yup. Fifteen dollars.
Tice bases this on the assertions that "investors are overlooking the risks in the consumer-finance field" and that earnings forecasts for Green Tree "are overstated," because the company's reserves for defaults reflect "aggressive accounting." Moreover, he points out, mobile-home sales are slowing.
On the latter point, Tice is right, sort of. Sales of manufactured homes (MH) were slow in the last quarter of 1996 and the first quarter of this year. Lousy weather was part of the problem, but so was an overstuffed retail channel, as home manufacturers moved too much product onto the lots -- particularly in the lower-priced single-wide category. Even so, analysts forecast five to seven percent growth for the MH industry in 1997. Moderating interest rates and low unemployment could boost those projections a bit higher.
Green Tree's MH business is growing faster than that -- in part because activity at the production and retail levels don't necessarily track precisely, but also because Green Tree continues to penetrate the both the MH seller and buyer sides of that business.
In fact, the company enjoyed a 13% increase in its MH loan business in Q1, to just over $1 billion. Moreover, that increase did not come about as a result of moving down the creditworthiness ladder nor by increasing the proportion of low-down-payment loans or loans on used homes. As a percentage of MH loan originations this quarter, 5%-down loans were actually 8 percentage points below the year-ago quarter.
In addition, rapid growth in Green Tree's newer business lines -- such as home equity loans and co-branded credit cards with home improvement centers -- are more than making up for any slowing on the MH side. MH accounted for 80% of Green Tree's business less than two years ago; that is projected to drop to 30% in two to three years, due almost entirely to the expansion of new products and services.
As for the "aggressive accounting" canard, Green Tree has always been among the more conservative companies in managing credit losses: in 1994, the company ended the year with 3.88% in its credit loss reserve; that reserve was 4.5% in 1995 and 5.37% in 1996. Comparing that last figure with 0.82% in actual charge-offs in 1996 illustrates that the company maintains reserves that are quite ample. So although credit losses have increased somewhat, Green Tree has increased its pricing and loss reserves to compensate for it.
Green Tree Financial is a Fortune 500 company, not some second-tier, subprime, fly-by-night operation. Tice is barking up the wrong tree.
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Stock Change Bid ATLS - 1/2 34.88 BGP - 3/4 24.00 CSL - 1/4 34.00 CSCO + 1/16 63.75 GNT - 1/8 35.13 ORCL + 15/16 49.56 OXHP -1 1/8 70.88 PMSI --- 11.63 TDW -1 3/8 39.75
Day Month Year History
BORING -0.94% 4.06% 10.34% 26.98%
S&P: +1.60% 4.15% 19.27% 42.12%
NASDAQ: +0.25% 0.79% 9.32% 35.58%
Rec'd # Security In At Now Change
2/28/96 400 Borders Gr 11.26 24.00 113.22%
3/5/97 150 Atlas Air 23.06 34.88 51.25%
5/24/96 100 Oxford Hea 48.02 70.88 47.58%
8/13/96 200 Carlisle C 26.32 34.00 29.16%
6/26/96 100 Cisco Syst 53.90 63.75 18.27%
2/2/96 200 Green Tree 30.39 35.13 15.59%
3/8/96 400 Prime Medi 10.07 11.63 15.46%
11/21/96 100 Oracle Cor 48.65 49.56 1.88%
12/23/96 100 Tidewater 46.52 39.75 -14.56%
Rec'd # Security In At Value Change
2/28/96 400 Borders Gr 4502.49 9600.00 $5097.51
5/24/96 100 Oxford Hea 4802.49 7087.50 $2285.01
3/5/97 150 Atlas Air 3458.74 5231.25 $1772.51
8/13/96 200 Carlisle C 5264.99 6800.00 $1535.01
6/26/96 100 Cisco Syst 5389.99 6375.00 $985.01
2/2/96 200 Green Tree 6077.49 7025.00 $947.51
3/8/96 400 Prime Medi 4027.49 4650.00 $622.51
11/21/96 100 Oracle Cor 4864.99 4956.25 $91.26
12/23/96 100 Tidewater 4652.49 3975.00 -$677.49
CASH $7788.54
TOTAL $63488.54
