Boring Portfolio

Boring Portfolio Report
Monday, March 17, 1997
by Greg Markus (MF Boring)

ANN ARBOR, Mich. (March 17, 1997) -- Today was the occasion for the wearing o' the green, but the Boring Portfolio looked decidedly less green today, losing 1.44% in net asset value. Eight stocks declined, ORACLE CORP (Nasdaq: ORCL) gained a dollar, and SOLECTRON (NYSE: SLR) closed unchanged. I'll have more to say about Solectron in a moment.

Major market indices were lower through much of the day, but large-capitalization stocks snapped back dramatically in the last hour of trading, sending the Dow and the S&P 500 into positive territory. Not so for the Nasdaq, however, which lost more than 1%.

Among the Nasdaq losers was CISCO SYSTEMS (Nasdaq: CSCO), which fell $1 3/8 (bid-side) on volume of nearly 18 million shares. This morning, First Albany analyst Barzowskas cut his fiscal 1997 and '98 earnings estimates for Cisco and retained his "neutral" rating on the stock.

According to published reports, Barzowskas trimmed his FY97 forecast to $2.05 per share from $2.11 and his FY98 estimate to $2.77 from $2.88. He cited near-term concerns about Cisco's Japanese and European operations, saying he believed that the company has become more aggressive about product pricing, thereby pressuring near-term earnings.

"The company's European business has been struggling as the demand for overall networking has slowed, and Cisco is trying to jump start its performance in the distribution channels," Barzowskas said.

I keep looking for the news in this analyst's update, but I'm not finding it. As for his EPS estimates, what Barzowskas did was move his FY97 estimate from above the median of analyst estimates to a bit below and move his FY98 estimate from well above the median to slightly above the median. His projections also indicate that he is using 35% as his estimate of Cisco's EPS growth rate over FY98, which begins in August: $2.77/$2.05 = 35.

Therefore, based on his own estimates, current fair value for CSCO is $2.05 x 35 = $ 71 3/4 -- or more than a 40% premium to today's price. This, he rates as "neutral." More amazing and amusing yet, this "insight" drops the stock under $50.

Words fail me.

On a percentage basis, shares of GREEN TREE FINANCIAL (NYSE: GNT) were clipped even worse than Cisco was -- and this on a day when all things green should be celebrating!

The explanation for Green Tree's drop lies almost certainly in investors' growing concerns about the ability of consumers to manage their debt, as well as growing expectations (which I happen not to share) that the Fed will move to hike interest rates later this month.

History has shown that small-to-moderate increases in interest rates do not hurt the earnings of companies in the financial sector, as Andrew Bary points out in the current issue of Barron's. Financial companies that fail to manage customer creditworthiness properly, on the other hand, can quickly find themselves in hot water.

That happened recently for a number of so-called "sub-prime" auto finance outfits and happened today for ADVANTA CORP (Nasdaq: ADVNA). Advanta issued a press release saying that it expects to report 1997 results well below expectations owing to continuing increases in consumer bankruptcies and charge-offs in its credit card business. Advanta didn't provide specifics, but according to a Dow Jones story, Advanta previously said its loss rate on credit cards was 6.38%, up from 5.26% in December.

In reaction, stocks in the financial services group fell sharply pretty much across the board, including Green Tree.

I called Green Tree today for clarification on their situation, but company executives were traveling. I hope to get a call back tomorrow. In the meantime, I refer to comments the company made in its conference call in January about its experiences with delinquencies in its lending businesses.

At that time, an analyst pointed out that some credit card companies have been reporting higher default rates than anticipated. He asked what Green Tree thought about the condition of credit quality in the coming year.

The company replied that in the past couple of years companies had indeed become increasingly aggressive towards credit and that some of them, including Green Tree would become more conservative in 1997.

Green Tree executives went on to say in that conference call that the company has always been comparatively conservative in managing credit losses and kept ample reserves for any credit losses. For example, in 1996 that reserve was 5.37%, as compared with the 0.82% in actual charge-offs that year. So although credit losses have increased somewhat, Green Tree has increased its pricing and loss reserves to compensate for it.

In its home equity and home improvement loan business, Green Tree said in January that its delinquency rates were in the 2.25% to 2.50% range -- or only one-third to one-half as high as Advanta's. So until I hear otherwise, I will continue to assume that Green Tree is managing its affairs quite nicely, thank you.

Finally tonight, after the closing bell Solectron reported results for its second fiscal quarter ending Feb. 28. Earnings of $0.65 per share were in line with analysts' consensus as reported in First Call -- which means they were better than what some analysts had projected and not as good as what some others were expecting. That compared with EPS of $0.52 last year and $0.63 in Q1 of this fiscal year. Sales for the quarter totaled $859 million, up 31% from the comparable quarter a year ago.

The company held its conference call with analysts this evening, and I participated in it. I'll provide a summary of the call tomorrow. For right now, I'll summarize simply by saying that although the results were very good, the company does not appear to be ramping up its systems assembly business as rapidly as they had anticipated. The weak European market that we have heard so much about is impacting their business to some degree, as well.

I've decided to pare back the Borefolio's exposure to technology stocks somewhat in light of current uncertainties, and therefore Solectron will be rotated out this week. I'll provide a fuller "sell" report later this evening.

I want to stress that this decision is not an easy one, and it is by no means a reflection on the company itself. Solectron is the cream of the crop in its business, which is why I added it to the Borefolio in the first place. But the entire sector is rife with uncertainty right now. Show the situation improve down the road, I'd be delighted to see Solectron back in the Borefolio again.

(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  -  1/8   23.25
BGP   -  3/8   41.63
CSL   -  3/8   31.50
CSCO  -1 3/8   49.13
GNT   -1 1/8   36.00
ORCL  +1       42.00
OXHP  -2 5/8   61.00
PMSI  -  3/8   10.75
SLR   ---      48.75
TDW    - 1/2  44.25
                   Day   Month    Year  History
        BORING   -1.44%  -1.28%  -1.30%  13.58%
        S&P:     +0.32%   0.62%   7.42%  28.01%
        NASDAQ:  -1.05%  -2.26%  -0.90%  22.91%

     Rec'd   #  Security     In At       Now    Change
  2/28/96  200 Borders Gr    22.51     41.63    84.90%
  5/24/96  100 Oxford Hea    48.02     61.00    27.02%
  8/13/96  200 Carlisle C    26.32     31.50    19.66%
   2/2/96  200 Green Tree    30.39     36.00    18.47%
   3/8/96  400 Prime Medi    10.07     10.75     6.77%
   3/5/97  150 Atlas Air     23.06     23.25     0.83%
  6/26/96  100 Cisco Syst    53.90     49.13    -8.86%
 10/15/96  100 Solectron     54.52     48.75   -10.59%
 11/21/96  100 Oracle Cor    48.65     42.00   -13.67%
 12/23/96  100 Tidewater     46.52     44.25    -4.89%

     Rec'd   #  Security     In At     Value    Change
  2/28/96  200 Borders Gr  4502.49   8325.00  $3822.51
  5/24/96  100 Oxford Hea  4802.49   6100.00  $1297.51
   2/2/96  200 Green Tree  6077.49   7200.00  $1122.51
  8/13/96  200 Carlisle C  5264.99   6300.00  $1035.01
   3/8/96  400 Prime Medi  4027.49   4300.00   $272.51
   3/5/97  150 Atlas Air   3458.74   3487.50    $28.76
  6/26/96  100 Cisco Syst  5389.99   4912.50  -$477.49
 11/21/96  100 Oracle Cor  4864.99   4200.00  -$664.99

 10/15/96  100 Solectron   5452.49   4875.00  -$577.49
 12/23/96  100 Tidewater   4652.49   4425.00  -$227.49

                             CASH   $2662.96
                            TOTAL  $56787.96