Boring Portfolio

Boring Portfolio Report
Tuesday, March 11, 1997
by Greg Markus (MF Boring)

ANN ARBOR, Mich. (March 11, 1997) -- Once again, it was Dow first, S&P 500 second, and Nasdaq third. Today, however, only the Dow managed to advance, struggling to hang on to a 6-point gain as interest rates moved higher.

The S&P and Nasdaq each lost ground, as did the Boring Portfolio -- to the tune of a full one percent loss in net asset value. Three Boring stocks advanced, two were unchanged, and five declined. Two winners were ATLAS AIR (Nasdaq: ATLS) and OXFORD HEALTH PLANS (Nasdaq: OXHP).

Atlas Air soared $1 1/8 to move into the black for the Borefolio. In addition to coverage of the stock here, airline industry specialist Holly Hegeman (mfwings@aol.com) provides regular updates on Atlas Air from her vantage point -- typically 35,000 feet above sea level. Holly's work is posted in The Motley Fool's Industry Area.

As for Oxford Health, the stock continues to advance into uncharted territory, gaining $1 1/8 to close at $65 7/8. I'm told that CEO Stephen Wiggins will be appearing Wednesday at Cowen & Co.'s healthcare conference in Boston. Ahead of that, Cowen analyst Mimi Willard issued an update reiterating what Wiggins said in the company's recent conference call with analysts (and summarized in The Motley Fool's "Earnings Central" section) -- namely, that Oxford will probably expand its operations into at least one new geographic market soon, possibly Florida.

BORDERS GROUP (NYSE: BGP) tumbled off the top shelf Tuesday, falling $3 5/8 on huge volume of 1.2 million shares. The company reported its fourth quarter and 1996 fiscal year results this morning -- $1.40 for the year, just as the company advised back on Jan. 30.

In the conference call this morning, Borders execs said that business so far in 1997 is slightly ahead of their expectations, probably due to generally favorable weather and a solid book list. Their "main competitor" (i.e., Barnes & Noble) has reportedly trimmed its discount policy to be more like that of Borders, margins on music are up, and 40 new superstores are planned for this year -- plus ramping up sales over the Internet. In a nutshell, everything is on course.

The company's guidance for FY97 remains at $1.80, with the business model projecting 25% to 30% EPS growth longer term. Also, the stock is slated to split 2-for-1 any day now; the "record date" for the split was today.

Wonderful. So, like, why'd BGP sell off?

Not having polled all the sellers, I don't know. But I have a pretty good idea.

Part of the selling is the normal "sell on the news" stuff that typically occurs after a stock has had a good pre-report run, as Borders did. There's more going on than that, though.

In this morning's conference call, company executives took it upon themselves to explain an arcane Financial Accounting Standards Board rule change on computing share-equivalents, and the effect of that change on Borders's accounting. In leading listeners through the math, one exec pretty clearly created an impression among some folks on the call that a nickel of the $1.80 projection for FY97 was in some way artificial -- the result of an accounting gimmick. Moreover, he said the accounting change also contributed a nickel to the Q4 results.

That part of the conference call occurred right around 11:30 am EST. Just to satisfy my curiosity, if someone has a log of BGP trades from this morning, I'd appreciate it if you'd drop me an e-mail (mfboring@aol.com) and tell me what the tape shows around that time of day.

In any case, here's my take on this:

First, you may have come across a story or two in the news recently about how FASB's rule change will benefit companies that have lots of in-the-money stock options issued to insiders -- such as Borders. Certainly the analysts should have.

Second, forget the share-equivalents stuff for a moment and consider the business. The Waldenbooks operations actually achieved positive same-store sales gains in Q4, due in part to some smart use of kiosks selling calendars in malls. I doubt that anyone dreamed that would happen. As for the superstores, comparable-store sales were up 11% in the holiday quarter -- well ahead of the business plan. Altogether, superstore sales rose 40% in FY96, and the roll-out of new stores this year will match that of 1996. Margins will improve, too, as the existing stores settle in.

Third, for the sake of argument, assume that the 1% reduction in shares outstanding due to the accounting change is something Janet Analyst hadn't figured on as part of the $1.80 projection. Fine. So trim your stock price back accordingly -- by $0.05/$1.80 = 2.8%, or $1.25 ... but not three or four dollars!

As usual, the market's knee-jerk reaction is to over-correct in the heat of the moment -- assuming that any adjustment is appropriate at all, which is arguable.

Speaking of over-corrections, shares of CISCO SYSTEMS (Nasdaq: CSCO) fell $5/8 after another analyst closed the barn door four weeks after the horses bolted. Hambrecht & Quist's Farrokh Billimoria downgraded Cisco to "buy" from "strong buy." He also cut his earnings estimates for Cisco's third quarter (ending April) by two pennies to $0.52 and cut the fourth quarter to $0.55 from $0.58. While he had the trimmers out, Billimoria nipped his FY98 forecast back to $2.67 a share, from $2.83.

Why?

According to Reuters, Billimoria said "Fundamentals of the sector are healthy. Budgets continue to grow and network rollouts are on track."

Um, then why cut?

Because while that is all "quite positive," said Billimoria, "it's a quarter away."

He really said that. A quarter away.

Oh, by the way: Cisco has scheduled a press conference tomorrow to announce new strategic alliances -- with Microsoft and Intel, to be precise.

Wintelco.

But then whatever that trio has planned might take even more than a quarter to develop. So who cares, right?

Not right.

(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
--------------------
ATLS  +1 1/8   23.50
BGP   -3 3/4   42.00
CSL   ---      32.00
CSCO  -  5/8   52.63
GNT   -  1/4   39.00
ORCL  -  1/4   35.63
OXHP  +1 1/8   65.88
PMSI  +  1/8   10.88
SLR   -  3/8   47.25
TDW     ----   44.75
                   Day   Month    Year  History
        BORING   -1.02%   0.39%   0.37%  15.50%
        S&P:     -0.28%   2.59%   9.53%  30.52%
        NASDAQ:  -0.45%   0.59%   1.99%  26.49%

    Rec'd   #  Security     In At       Now    Change
  2/28/96  200 Borders Gr    22.51     42.00    86.56%
  5/24/96  100 Oxford Hea    48.02     65.88    37.17%
   2/2/96  200 Green Tree    30.39     39.00    28.34%
  8/13/96  200 Carlisle C    26.32     32.00    21.56%
   3/8/96  400 Prime Medi    10.07     10.88     8.01%
   3/5/97  150 Atlas Air     23.06     23.50     1.92%
  6/26/96  100 Cisco Syst    53.90     52.63    -2.37%
 10/15/96  100 Solectron     54.52     47.25   -13.34%
 11/21/96  100 Oracle Cor    48.65     35.63   -26.77%
 12/23/96  100 Tidewater     46.52     44.75    -3.81%

    Rec'd   #  Security     In At     Value    Change
  2/28/96  200 Borders Gr  4502.49   8400.00  $3897.51
  5/24/96  100 Oxford Hea  4802.49   6587.50  $1785.01
   2/2/96  200 Green Tree  6077.49   7800.00  $1722.51
  8/13/96  200 Carlisle C  5264.99   6400.00  $1135.01
   3/8/96  400 Prime Medi  4027.49   4350.00   $322.51
   3/5/97  150 Atlas Air   3458.74   3525.00    $66.26
  6/26/96  100 Cisco Syst  5389.99   5262.50  -$127.49
 11/21/96  100 Oracle Cor  4864.99   3562.50 -$1302.49
 10/15/96  100 Solectron   5452.49   4725.00  -$727.49
 12/23/96  100 Tidewater   4652.49   4475.00  -$177.49

                             CASH   $2662.96
                            TOTAL  $57750.46