Boring Portfolio

Boring Portfolio Report
Tuesday, February 18, 1997
by Greg Markus (MF Boring)

ANN ARBOR, Mich. (Feb. 18, 1997) -- A late-session buying program on Tuesday sent the Dow Jones Industrial Average soaring nearly 80 points to well over the 7,000 mark again. The S&P 500 advanced 8 points (0.97%), but the Nasdaq closed slightly lower (- 0.10%).

Other than a fourth quarter earnings report from OXFORD HEALTH PLANS (Nasdaq: OXHP), and a subsequent $2-3/8 drop in that stock, the Boring portfolio enjoyed a fairly quiet day. A few stocks were off fractionally, a few others were unchanged, and CISCO SYSTEMS (Nasdaq: CSCO) rose $1-1/8 despite some continuing weakness among networking stocks generally.

I notice that Cisco was selected last week as the "Stock of the Month" by a certain newsletter famous (or infamous) for selecting "momentum" stocks. Among this newsletter's recent recommendations are CENTENNIAL TECHNOLOGY (NYSE: CNT) and RADISYS CORP (Nasdaq: RSYS), companies that are currently, shall we say, under a cloud. Happily, Cisco is big enough and strong enough to withstand even this newsletter's "recommendation."

GREEN TREE FINANCIAL (NYSE: GNT), unchanged at $41-1/8, was mentioned in an article appearing in today's Wall Street Journal. Reporter Gregory Zuckerman's story focused on how "difficulties" at subprime lenders such as JAYHAWK ACCEPTANCE (Nasdaq: JACCQ) and MERCURY FINANCE (NYSE: MFN) have pressured prices of asset-backed securities and motivated investors to scrutinize issuers of those securities more carefully.

In case you aren't current on such things -- and there's no particular reason you should be -- an asset-backed security is created when a firm sells to investors the right to receive regular payments arising from an income-producing instrument -- typically a bundle of loans made for purchases of homes, automobiles, or other big-ticket items. Rock star David Bowie has reportedly begun offering his own asset-backed securities, with the income stream to come from his record sales and royalties.

The Slim White Dude is simply following in the footsteps of Green Tree Financial. Green Tree has been a leader and innovator in the asset-backed securities market -- a market that is projected to top $141 billion in aggregate volume this year. Green Tree offers asset-backed securities collateralized by loans for manufactured homes, home improvements, horse trailers, motorcycles, pianos, airplanes, ... all kinds of stuff.

Although Green Tree has been quite successful, its asset-backed securities have perhaps not been afforded the premium they should have garnered over the offerings of lesser lights, such as the Jayhawks and the Mercurys. That's because investors had been lulled by the healthy returns promised by asset-backed securities and didn't pay sufficient attention to the quality of the issuers, according to Zuckerman's report.

Now that's changing, and investors are being more discriminating. As a consequence, while prices for lower-quality asset-backed securities have tumbled, "prices on Green Tree securities remain stable," says the article.

Even so, some investors are still not doing their homework in the asset-backed market, according to Bob Michael, a portfolio manager at BlackRock Financial Management, who is quoted in Zuckerman's story. "There has been some differentiating, but not as much as there should be," said Michael.

I don't know how you read this, but I take it to mean that, sooner or later, quality wins out. And in the asset-backed securities market, Green Tree is quality.

And maybe David Bowie is, too.

Speaking of quality, Oxford Health reported fourth quarter results this morning. Net earnings rose 105% on a revenue increase of 64% when compared with 1995's fourth quarter. Net earnings of $0.39 per share topped analysts' consensus estimate as listed in First Call by three cents and exceeded the highest listed estimate by a penny.

Oxford's enrollment totaled exceeded 1.5 million members as of December 31, 1996, a 52% gain for the year. In addition, the company reported that almost 155,000 net new members enrolled in the month of January, bringing the total to 1.69 million as of February 1.

I participated in Oxford's follow-up conference call report this morning and will offer my summary here in The Motley Fool shortly. For now, I offer my own quick take on the earnings report and CEO Stephen Wiggin's commentary.

First, I don't need to remind Oxford followers how far ahead the company is from the competition -- not only in terms of producing impressive numbers quarter after quarter but in terms of understanding, indeed defining, the broad contours of healthcare provision in America. The conference call featured discussion of Oxford's progress in utilizing disease-specific treatment groups, plans for electronic commerce (visit to see for yourself), new approaches to reduce the need for patients to visit "gatekeeper" physicians before getting referrals to specialists, and more.

Also, in stark contrast to the disarray among Oxford's competitors in adapting to New York State's newly enacted changes for funding graduate medical education, Oxford has already negotiated and signed contracts with the vast majority of hospitals it does business with, getting very favorable cuts in per diem charges in the process. Some "competing" providers have yet to renegotiate and sign their first contracts under the new rules; Oxford has signed more than 70 of them, and has approximately two dozen more underway.

Oxford's medical loss ratio actually declined this past quarter, to 80.0%. Indeed the company believes that it can achieve efficiencies in 1997 that will permit it to cut membership rates, making it even more competitive, while maintaining net margins. Some analysts may have reacted in knee-jerk fashion to any mention of possible rate cuts. If so, they don't "get it," in my opinion.

Everything at Oxford is not all sweetness and light. As we've heard from Oxford members who posted in The Motley Fool over the past couple of months, Oxford experienced -- and continues to experience -- a major headache with installing its completely new Oracle-based information management system. There were some weeks last quarter in which zero throughput occurred: no bills processed, no nothing. That caused accounts receivable to balloon, which the company says they are working off by adding a second shift to process paperwork. The company is also spending something on the order of $800,000 per month on systems consultants -- although that is ramping down and should be pretty well gone by June or so, according to Oxford.

Interestingly, the looming shadow of Medicare reform appears now to be one of the lesser concerns. Some features of the current White House proposal, such as changes in how medical education would be funded, are quite similar to what Oxford just dealt with in New York, with the result of extending further its lead over the competition. Oxford could cope with other aspects of the proposed Medicare cuts to HMOs by shifting its marketing emphases from less profitable counties to more profitable ones, instituting rate or service adjustments, and other moves.

Mostly, though, Wiggins argues that President Clinton can best achieve his targeted cost reductions by increasing incentives for Medicare recipients to move into HMOs, rather than using the heavy hand of government to intrude on a market-based solution to riding that is generally working well for the government and for Medicare recipients. In my opinion, that's an argument that Republicans already find very appealing, and it may well be one that even the President can get his arms around.

Oh yeah, the stock. It sold off a bit today. OXHP had a sharp runup in the week preceding the earnings report, so I suspect that most of today's loss can be chalked up to "sell on the news" profit-taking.

In a story from Reuter late this afternoon, Merrill Lynch analyst Margo Vignola was quoted as saying that Oxford "had sterling enrollment growth. Strong earnings. Stellar numbers overall. They're off on some basic profit taking."

Gary Frazier, an analyst with Bear Stearns, observed in the story that revenue growth of 64% may have been a bit below what some analysts had been looking for, although it was "still very exceptional."

Oxford Health stock always has been and probably always will be volatile -- reactive to the latest tidbit of news or rumor. It's clearly not a stock for folks who prefer more sedate growth -- and I personally would have trouble sleeping at night if my portfolio consisted entirely of stocks as, uh, exciting as OXHP is. On the other hand, if one wants to have an equity stake in the clear leader of the all-important healthcare industry, I'm hard-pressed to find something preferable to Oxford Health.

(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.

Today's Numbers

Stock  Change    Bid
BGP   ---      42.88
CSL   -  3/8   35.00
CSCO  +1 1/8   63.63
GNT   ---      41.13
ORCL  -  1/8   40.63
OXHP  -2 3/8   59.13
PMSI  ---      11.38
SLR   -  3/8   55.75
TDW   -  5/8   43.75
                    Day   Month    Year  History
        BORING   -0.51%   0.77%   5.39%  21.27%
        S&P:     +0.97%   3.83%  10.20%  31.32%
        NASDAQ:  -0.10%  -1.02%   5.79%  31.20%

    Rec'd   #  Security     In At       Now    Change

  2/28/96  200 Borders Gr    22.51     42.88    90.45%
   2/2/96  200 Green Tree    30.39     41.13    35.34%
  8/13/96  200 Carlisle C    26.32     35.00    32.95%
  5/24/96  100 Oxford Hea    48.02     59.13    23.11%
  6/26/96  100 Cisco Syst    53.90     63.63    18.04%
   3/8/96  400 Prime Medi    10.07     11.38    12.97%
 10/15/96  100 Solectron     54.52     55.75     2.25%
 12/23/96  100 Tidewater     46.52     43.75    -5.96%
 11/21/96  100 Oracle Cor    48.65     40.63   -16.50%

    Rec'd   #  Security     In At     Value    Change

  2/28/96  200 Borders Gr  4502.49   8575.00  $4072.51
   2/2/96  200 Green Tree  6077.49   8225.00  $2147.51
  8/13/96  200 Carlisle C  5264.99   7000.00  $1735.01
  5/24/96  100 Oxford Hea  4802.49   5912.50  $1110.01
  6/26/96  100 Cisco Syst  5389.99   6362.50   $972.51
   3/8/96  400 Prime Medi  4027.49   4550.00   $522.51
 10/15/96  100 Solectron   5452.49   5575.00   $122.51
 12/23/96  100 Tidewater   4652.49   4375.00  -$277.49
 11/21/96  100 Oracle Cor  4864.99   4062.50  -$802.49

                             CASH   $5999.08
                            TOTAL  $60636.58