Boring Portfolio

Boring Portfolio Report
Thursday, June 19, 1997
by Greg Markus (TMF Boring)

BOSTON, Mass. (June 19, 1997) -- The Boring Portfolio popped for a 2.20% gain on Thursday, more than double the gains that moved the S&P 500 and Nasdaq Composite to new records. The Borefolio established an all-time high of its own: $65,326 in net asset value.

HMO stocks fared well today following the U.S. Senate Finance Committee's unanimous approval of legislation that would encourage Medicare recipients to shift from fee-for-service into managed care organizations. As compared with some earlier scenarios, the proposal also appears to be somewhat less harsh with regard to payments to HMOs.

No HMO stock was healthier than that of OXFORD HEALTH PLANS (Nasdaq: OXHP). Oxford soared $5 3/8 in heavy trading to a bid of $74 1/8, just shy of a new record.

There was nothing shy about the performance of shares of CARLISLE COMPANIES (NYSE: CSL). CSL shot up $2 3/4 on double its average trading volume to establish a new high at $36 3/8. I could locate no specific news that might account for the move, but it may be related to the settlement of a labor dispute between GENERAL MOTORS (NYSE: GM) and auto-workers at a plant in Michigan.

GREEN TREE FINANCIAL (NYSE: GNT) contributed a gain of $1 1/2 to the Borefolio's cause. Again, I saw no specific news, although information from the latest regional surveys conducted for the Federal Reserve suggest that the Fed may decide to leave interest rates alone when they meet early month.

Wow. A Goldilocks economy (not too hot, not too cold), moderating interest rates, new records in stocks ... even a press release today from Prudential Securities in which highly-respected quantitative analyst Ralph Acampora predicts that the Dow will climb to 10,000 by June of 1998, barring any substantial upward movement in interest rates.

What more could one ask for?

Well, if you're a Boring sort, one might ask for someone to dial down the "Whoopee!" knob just a tad. In that regard, I recommend to you the latest installment of Roger Lowenstein's "Intrinsic Value" column, a feature in the Wall Street Journal (and also available on AOL at the Dow Jones site).

The focus of Lowenstein's latest column is the valuation of the S&P 500. As The Motley Fool's economics contributor "Macrodata" informs us in the Economy and Markets area of TMF -- and as Lowenstein reiterates today -- an appropriate (some would say the appropriate) gauge of how cheap or dear "the market" is involves a comparison of the dividend yield of the "risk-free" 30-year Treasury bond with the earnings yield of the 500 stocks comprising the benchmark portfolio assembled by the folks at Standard & Poor's.

The earnings yield is simply the inverse of the better-known price/earnings ratio, or p/e. It tells you the percentage of a stock's price (or in this case, the aggregate price of 500 stocks) that accrues to investors in the form of earnings.

If anyone needs convincing, Lowenstein provides a graph showing that the earnings yield of the S&P 500 (calculated using expected earnings 12-months ahead) tracks the long-bond rate closely. Typically, stocks yield a little more, consistent with the notion that equities investors should get something extra to compensate for the additional risk they shoulder. After all, stocks have been known to go down in price, whereas one knows with as close to certainty as one can attain in an imperfect world what a U.S. Treasury bond held to maturity will pay.

Last December -- a time characterized in public by at least one authority as one of "irrational exuberance" -- the earnings yield on the S&P 500 and the bond yield were essentially equal, at 6.4%. ("Macrodata" pointed this out at the time.) Now, six months later, the historical discount for the risk inherent in stocks has swung over to become, in Lowenstein's words, "a yawning premium." Put your money in 30-year bonds and receive 6.68%. Put it in stocks and receive an implicit return of 5.48% -- that is, the inverse of the year-ahead p/e of 18.25 for the S&P 500.

Held long enough -- and assuming that stocks can sustain double-digit earnings growth into the millennium -- the implied return on the S&P "might even be as much as the government will pay you now." That's not exactly a stunningly attractive risk/reward ratio.

So what should one do, assuming one finds this argument convincing? One thing that undeniably does not follow from the argument is that one ought bail out of stocks in knee-jerk fashion. Many stocks -- and attractive ones, too -- have largely sat out of the party while the blue chips danced the Macarena.

Green Tree Financial, which even happens to be a member of the select S&P 500, is trading a modest 12-times projected earnings -- a substantial discount to both near- and longer-term estimated EPS growth and toward the low end of the stock's p/e range over the past few years. So even though I happen to believe that the market as a whole is expensive, I have no intention of raising cash in the Borefolio by selling GNT.

Carlisle Companies, to pick another name out of the air, is among the less volatile stocks in the universe covered by Value Line and has a solid balance sheet. CSL is trading at approximately 17-times the company's estimated earnings for 1997 -- a discount to the S&P 500. Yet analysts expect Carlisle to grow earnings at roughly twice the rate of the S&P for a good while yet.

In fact, every one of the current Borefolio stocks trades at a multiple to earnings that is eminently defensible in terms of plausible expectations about each company's near- and middle-term earnings growth. That even applies to high-rent holdings like CISCO SYSTEMS (Nasdaq: CSCO) or ORACLE CORP. (Nasdaq: ORCL), stocks that now trade at premium multiples enjoyed by certain, well, soap makers or pop bottlers.

So I don't think it follows that one should raise cash indiscriminately despite a distinct odor of niftiness wafting from stocks of the largest 50 or so companies in America. What I do think follows is that, perhaps more than ever, one must keep one's head screwed firmly onto one's shoulders and own stocks with valuations that make sense. And, as much as I like and even admire a good many S&P 500 companies, I would pick and choose among them rather than simply buy the entire basketload.

Just so that we're clear on this, I'm stating what I think, and how I plan to manage this portfolio. What you do with your money is your business, not mine.

Moreover, my one venture in market-timing with the Borefolio was distinctly unsuccessful. Last fall, I sold the Borefolio's 100 S&P 500 DEPOSITORY RECEIPTS (AMEX: SPY) because I thought the market was overvalued (moderately) at that time. In the seven months since, those itsy-bitsy Spiders crept up another 25%.

Fool Message Boards -- what are Fools saying?
Evening News -- Big movers, up and down.
Daily Double
-- How can you find the next double?
Daily Trouble -- Is there value in this beaten down stock?
The Fool Portfolio -- AOL, Iomega, 3Com... and more.
Fool Four -- Trying to catch the market.

(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

Stock  Change    Bid
ATLS  -1 1/8   32.50
BGP   +  1/4   24.13
CSL   +2 3/4   36.38
CSCO  +115/16  68.94
GNT   +1 1/2   37.50
ORCL  - 11/16  49.56
OXHP  +5 3/8   74.13
PMSI  -  1/16  11.50
TDW   -  1/8   43.75
                   Day   Month    Year  History
        BORING   +2.20%   7.07%  13.54%  30.65%
        S&P:     +1.00%   5.86%  21.23%  44.46%
        NASDAQ:  +1.03%   3.34%  12.09%  39.02%

     Rec'd   #  Security     In At       Now    Change
  2/28/96  400 Borders Gr    11.26     24.13   114.33%
  5/24/96  100 Oxford Hea    48.02     74.13    54.35%
   3/5/97  150 Atlas Air     23.06     32.50    40.95%
  8/13/96  200 Carlisle C    26.32     36.38    38.18%
  6/26/96  100 Cisco Syst    53.90     68.94    27.90%
   2/2/96  200 Green Tree    30.39     37.50    23.41%
   3/8/96  400 Prime Medi    10.07     11.50    14.22%
 11/21/96  100 Oracle Cor    48.65     49.56     1.88%
 12/23/96  100 Tidewater     46.52     43.75    -5.96%

     Rec'd   #  Security     In At     Value    Change
  2/28/96  400 Borders Gr  4502.49   9650.00  $5147.51
  5/24/96  100 Oxford Hea  4802.49   7412.50  $2610.01
  8/13/96  200 Carlisle C  5264.99   7275.00  $2010.01
  6/26/96  100 Cisco Syst  5389.99   6893.75  $1503.76
   2/2/96  200 Green Tree  6077.49   7500.00  $1422.51
   3/5/97  150 Atlas Air   3458.74   4875.00  $1416.26
   3/8/96  400 Prime Medi  4027.49   4600.00   $572.51
 11/21/96  100 Oracle Cor  4864.99   4956.25    $91.26
 12/23/96  100 Tidewater   4652.49   4375.00  -$277.49

                             CASH   $7788.54
                            TOTAL  $65326.04