Boring Portfolio

Boring Portfolio Report
Friday, February 28, 1997
by Greg Markus (MF Boring)

ANN ARBOR, Mich. (Feb. 28, 1997) -- The one-two combination of turmoil in networking stocks followed by a Greenspan-inspired sell-off in stocks of all flavors made for a thoroughly nasty week for equities investors generally and the Boring Portfolio in particular.

The Borefolio lost 3.22% in net asset value this past week, and 4.40% for the month of February. That resets the Boring n.a.v. clock back to where it was on the first day of 1997. Two months' work and zippo to show for it -- except another layer of investment experience, I guess.

I take no consolation from the fact that the Nasdaq Composite had an even more awful February than the Borefolio did, losing 5.13%. The Nasdaq is up only a bit more than 1% for the year-to-date, as compared with a 6.76% advance for the S&P 500 in 1997. And at least some market analysts expect the divergence of larger stocks and smaller ones -- especially in the technology sector -- to continue.

Or not.

The market will do what the market will do. What I try to do is carefully build a portfolio of reasonably-priced stocks of leading companies arrayed across a range of solidly growing industries ... and relax, knowing that in the long run -- and even in the middle run of one to three years -- growth in earnings per share is the single most important determinant of stock prices.

The broader interest-rate environment for all equities is the other big ingredient to take into account. It raises and lowers all equities boats more or less equally, as stocks compete with the yield on bonds for investors' dollars. Chairman Greenspan's recent comments to the contrary notwithstanding, many economic forecasters (which is journalist-speak for "the guy writing the story") expect interest rates to remain in a range quite favorable to equities during 1997. Indeed, a plausible argument can be constructed for lowering interest rates, rather than raising them.

With that bit of "Wall Street Week" huff-and-puff out of the way, let's take a quick look at what Boring stocks did on Friday. Altogether, the Borefolio dipped half a percentage point in value -- a bit less than the S&P 500 and a bit more than the semi-recovering Nasdaq. Seven Boring holdings fell on Friday (although all only fractionally), while two -- CISCO SYSTEMS (Nasdaq: CSCO) and TIDEWATER (NYSE: TDW) -- rose (also only fractionally, alas).

Cisco gained a quarter-point, which is no big deal in itself. What I see as more significant is that this occurred despite a large story in the Wall Street Journal by Lee Gomes that highlighted all the networking leader's supposed "weak spots." You know them all by now:

o The slowdown in Cisco's rate of increase in hiring. Response: You mean, from breakneck to merely real fast?

o The "challenge" posed by the announced merger of 3Com and U.S. Robotics. Response: The biggest threat to Cisco since the, uh, Bay-SynOptics combination? (Note: I think 3Com and Robot are both great companies and could make a great team; I just don't see them as a threat to Cisco.)

o The IP switch "threat." Response:: "Hey, Joe. Rip out all those Cisco routers and switches and buy me a few $100K of those new Ipsilon-equipped thingies." Yeah, right. Also, Cisco's tag switching is not "slideware."

o The Microsoft Steelhead routing software. Response: Microsoft! Ooh-h-h! That's scary! But it works only with Windows NT and can't begin top match the performance even of Cisco's midrange hardware-software products.

o Cisco is "short-changing its hardware-engineering efforts" and "not churning out faster routers." Response: Let's wait 'til summer and see how the "Popeye" carrier-class router/switch -- stacks up, technology-wise. Also, you did hear CEO John Chambers say the other day about Cisco plans to make perhaps ten acquisitions this year? Might that juice things up a bit?

My point is that the bear's story is all out there now ... and the stock went up.

Hey, I don't pretend to be disinterested in this. I'm a Cisco bull. I bought the stock for the Borefolio (and own it myself) for a reason: I think it's the stock, and the company, for the next decade. Or more.

That ain't advice. Homey don't give advice. That's just how I see it.

Two other quick notes:

First, PRIME MEDICAL SERVICES (Nasdaq: PMSI) dipped $3/8 today, on moderate trading volume. That may have been prompted by a report from a Prudential analyst who cut his 1997 numbers in a research bulletin today.

If so, then folks should have read the report more closely. The analyst's "cut" resulted from him refiguring Prime's 1997 tax rate and otherwise bringing his numbers in line with those of other analysts. Even his revised estimates call for EPS of $0.60, on a fully-taxed basis (or $0.76, nominally) -- which would constitute a 33% increase over the $0.45 (on a fully-taxed basis) that Prime reported Thursday.

Prime is thus trading at around 19 times projected fully-taxed EPS for the year -- or a market multiple. The analyst is also forecasting $0.90, fully-taxed, for 1998 -- which is consistent with estimates that other analysts have offered. So even if the multiple does not expand, that suggests an $17 target price ($0.90 x 19).

The other quick note is about Tidewater. The company was mentioned in a story in the latest issue of Business Week as a bargain in the oil services group. The article quotes William Walker, president of Howard Weil Labouisse Friedrichs, an energy investment firm in New Orleans. "I've seldom seen a better time to invest," says Walker.

The latest installment of Value Line also contains a fresh report on Tidewater -- sporting a "1" rating for Timeliness. Analyst Christopher Bischof is looking for $2.25 for the fiscal year ending next month, $3.00 for the coming FY. He points out -- as the company has -- that the size of the fleet of offshore support vessels continues to shrink as demand for the vessels rises. At today's price of $43, TDW is trading at less than 15-times Bischof's projected EPS for the coming year -- and that doesn't even factor in Tidewater's 1.4% dividend.

Here's to the month of March. May it offer us opportunities to put to good use the lessons learned in February!

(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   -  5/8   42.13
CSL   -  1/4   32.75
CSCO  +  1/4   55.38
GNT   -  3/8   37.50
ORCL  -  5/8   39.25
OXHP  -  1/8   55.50
PMSI  -  3/8   11.13
SLR   -  7/8   52.88
TDW   +  1/2   43.00
                   Day   Month    Year  History
        BORING   -0.50%  -4.40%  -0.02%  15.05%
        S&P:     -0.54%   0.59%   6.76%  27.22%
        NASDAQ:  -0.28%  -5.13%   1.39%  25.75%

    Rec'd   #  Security     In At       Now    Change

  2/28/96  200 Borders Gr    22.51     42.13    87.12%
  8/13/96  200 Carlisle C    26.32     32.75    24.41%
   2/2/96  200 Green Tree    30.39     37.50    23.41%
  5/24/96  100 Oxford Hea    48.02     55.50    15.57%
   3/8/96  400 Prime Medi    10.07     11.13    10.49%
  6/26/96  100 Cisco Syst    53.90     55.38     2.74%
 10/15/96  100 Solectron     54.52     52.88    -3.03%
 12/23/96  100 Tidewater     46.52     43.00    -7.58%
 11/21/96  100 Oracle Cor    48.65     39.25   -19.32%

    Rec'd   #  Security     In At     Value    Change

  2/28/96  200 Borders Gr  4502.49   8425.00  $3922.51
   2/2/96  200 Green Tree  6077.49   7500.00  $1422.51
  8/13/96  200 Carlisle C  5264.99   6550.00  $1285.01
  5/24/96  100 Oxford Hea  4802.49   5550.00   $747.51
   3/8/96  400 Prime Medi  4027.49   4450.00   $422.51
  6/26/96  100 Cisco Syst  5389.99   5537.50   $147.51
 10/15/96  100 Solectron   5452.49   5287.50  -$164.99
 12/23/96  100 Tidewater   4652.49   4300.00  -$352.49
 11/21/96  100 Oracle Cor  4864.99   3925.00  -$939.99

                             CASH   $5999.08
                            TOTAL  $57524.08