Boring Portfolio

Boring Portfolio Report
Thursday, July 24, 1997
by Mark Weaver (mweav) and
Greg Markus (TMFBoring)

ST. LOUIS, Mo., and ANN ARBOR, Mich. (July 24, 1997) -- Mark Weaver here... I'll be covering today's action in the Borefolio and will say a word about valuation, while Greg will give the skinny on the earnings announced by PRIME MEDICAL (Nasdaq: PMSI) and ATLAS AIR (Nasdaq: ATLS). Neither earnings report had much impact on the stocks, with Prime up a "teenie" bit and Atlas down the same.

The Borefolio moved to a new all time high, outperforming both the S&P and the Naz, both of which also continued a northward march.

Winners today included BORDERS GROUP (NYSE: BGP), CARLISLE (NYSE: CSL), GREENTREE FINANCIAL (NYSE: GNT) and OXFORD HEALTH PLANS (Nasdaq: OXHP). The latter three stocks are at all time highs.

Losers included CISCO SYSTEMS (Nasdaq: CSCO), TIDEWATER (NYSE: TDW) and ORACLE (Nasdaq: ORCL). Only Oracle had news. Oracle and HEWLETT PACKARD (NYSE: HWP) announced a strategic alliance that could only be good news for Oracle stockholders. The stock was the Borefolio's biggest loser -- go figure.

When I look at the Borefolio holdings I'm struck by the very strong performances some of these stubs have put up since their purchases. Five of nine holdings are pounding the market averages over their holding period.

One the one hand, that's just great. On the other hand, though, it leads me to paraphrase one famous St. Louis company and ask: How does an investor "know when to say when?"

Let's face it, certain stocks make it into the Borefolio because they represent great companies. But even great companies can be overvalued in the marketplace. Most folks would agree that a stock growing at a consistent 20% per year pace yet has a PE in the 80s is a "sell." But what about less obvious situations? TMF Templr wrote a useful piece for the Fool Evening News recently on how to sell sensibly -- it's highly recommended.

As far as the Borefolio goes, one stock that's beginning to look a bit rich to my eye is OXHP, an old favorite of mine. Oxford Health is one of the premiere healthcare industry stocks. The company competes in a very tough segment of the healthcare market, however. Medical loss ratios and administrative expenses must be controlled or profits vaporize -- as they did for PACIFICARE (Nasdaq: PHSYB) and MID ATLANTIC MEDICAL SERVICES (NYSE: MME). Profit margins are razor thin. There isn't much room for error.

Oxford has performed nearly flawlessly to date, but there are no "perfect" companies. Although you wouldn't know it from looking at a graph of the stock, Oxford went through a tough patch the last couple of quarters as it implemented a "forklift upgrade" of its entire management information systems. Billing and reimbursements slowed to a crawl, angering some customers and hospitals.

The worst appears to be behind the company now, but my point is that even the best of companies can stumble occasionally. And, at least sometimes, the stock price can tumble as a result -- especially if its valuation has been bid up to the point where there's no wiggle-room left.

Happily, to these eyes, the most likely blips for Oxford are positive ones: increasing Medicare sign-ups in New York and the strong possibility of expansion into new geographic regions. News items this week about an impressive breast cancer program and an initiative on alternative medical care in conjunction with Beth Israel Hospital show the creativity of this healthcare company.

A look at OXHP's valuation shows a YPEG of around $91, based on a consensus EPS estimate of $2.47 for 1998 and an estimated long-term growth rate of 37%, according to First Call. That's still up a bit from the current price, but the stock is nowhere near as undervalued as when the Borefolio first acquired the shares. At $91, an investor arguably has a fully-valued stock over roughly the next 12 months -- albeit one with likely long-term annual growth prospects in the mid- to upper-30% stratosphere.

The YPEG exercise suggests that should OXHP venture into the high $80s or even low $90s soon, the stock could "rest" a while, or even retrace a bit: anyone who has followed OXHP's dynamics knows that it can be a fairly volatile stock.

This scenario assumes that no new information has come into play to justify the price rise, however. Should favorable news -- either of an industrywide nature (Medicare recipients moving into HMOs?) or company-specific (Oxford expanding into a new territory?) raise EPS projections or growth rate estimates, then we're back to re-valuing the stock.

And now a word from Greg...

Two Boring companies reported quarterly results today. (So much for my day off.)

PRIME MEDICAL SERVICES (Nasdaq: PMSI) earned $0.19 per share for the June quarter, in line with analysts' estimates. Revenues increased 24% over the year-ago period to $23.2 million. Because Prime's effective tax rate increased from 9% in the year-ago quarter to 24% this year, you get a clearer picture of the company's internal growth by looking at pre-tax rather than after-tax earnings gains: pre-tax income increased 38% to $4.84 million, from $3.50 million last year.

The large increase in revenues and pre-tax earnings reflects Prime's Jonah-swallows-the-whale acquisition of Lithotripters Inc. on May 1, 1996. Prime also acquired three lithotripters during the second quarter of this year, bringing its total to 58. The company's new Prostatron joint venture for the treatment of benign prostatic hyperplasia is progressing on schedule, as are new business opportunities in providing office services to urologists.

The Motley Fool covered Prime's follow-up conference call and will provide a summary shortly.

Also reporting during the day was ATLAS AIR (Nasdaq: ATLS). The Colorado-based air freight carrier earned $0.16 per share for the June quarter on revenues of $93.9 million. That was in line with a consensus forecast that was lowered considerably following Atlas's disclosure earlier this month about continuing problems with five winged lemons it operates, sort of, on lease from FEDERAL EXPRESS (NYSE: FDX). It turns out that the main things those aged cargo planes managed to get airborne were maintenance and repair bills.

Atlas foresees better days ahead, once it unloads those aircraft back on FedEx in January and begins taking delivery of brand new BOEING (NYSE:BA) 747-400s in May. But between now and then it could be a fairly turbulent flight, so ATLS is probably not a stock for those with sensitive stomachs.

TMF covered Atlas's post-report conference call -- all 95 grueling minutes of it -- and will provide a synopsis suitable for family reading, ASAP.

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(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  -  1/16  22.56
BGP   +  3/8   26.19
CSL   + 13/16  41.06
CSCO  -  1/2   79.88
GNT   +  9/16  45.06
ORCL  -1 7/8   54.75
OXHP  +2 1/4   87.50
PMSI  +  1/16  11.81
TDW   -  1/8   48.06
                   Day   Month    Year  History
        BORING   +0.59%   9.92%  22.91%  41.44%
        S&P:     +0.40%   6.23%  26.94%  51.27%
        NASDAQ:  +0.09%   8.81%  21.54%  50.74%

    Rec'd   #  Security     In At       Now    Change
  2/28/96  400 Borders Gr    11.26     26.19   132.65%
  5/24/96  100 Oxford Hea    48.02     87.50    82.20%
  8/13/96  200 Carlisle C    26.32     41.06    55.98%
   2/2/96  200 Green Tree    30.39     45.06    48.29%
  6/26/96  100 Cisco Syst    53.90     79.88    48.19%
   3/8/96  400 Prime Medi    10.07     11.81    17.32%
 11/21/96  100 Oracle Cor    48.65     54.75    12.54%
 12/23/96  100 Tidewater     46.52     48.06     3.30%
   3/5/97  150 Atlas Air     23.06     22.56    -2.15%

    Rec'd   #  Security     In At     Value    Change
  2/28/96  400 Borders Gr  4502.49  10475.00  $5972.51
  5/24/96  100 Oxford Hea  4802.49   8750.00  $3947.51
  8/13/96  200 Carlisle C  5264.99   8212.50  $2947.51
   2/2/96  200 Green Tree  6077.49   9012.50  $2935.01
  6/26/96  100 Cisco Syst  5389.99   7987.50  $2597.51
   3/8/96  400 Prime Medi  4027.49   4725.00   $697.51
 11/21/96  100 Oracle Cor  4864.99   5475.00   $610.01
 12/23/96  100 Tidewater   4652.49   4806.25   $153.76
   3/5/97  150 Atlas Air   3458.74   3384.38   -$74.36

                             CASH   $7890.00
                            TOTAL  $70718.13