Boring Portfolio

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

ANN ARBOR, Mich. (March 18, 1997) -- Another wild ride for stocks as traders squared positions ahead of tomorrow's Consumer Price Index report and a triple-expirations Friday. Program selling dropped the Dow by 100-points late this afternoon, part of which it recovered by the closing bell to end down 60 (-0.85%). The S&P 500 slid -0.76%, and the Nasdaq did about the same -- its sixth straight losing session.

Net asset value of the Boring Portfolio ... rose! True, it was only by 0.06%. But on a day like today, I'll gladly take it. Four stocks up, four down, and two unchanged -- basically boring.

Following SOLECTRON'S (NYSE: SLR) report of their second quarter results late yesterday, I decided to rotate the stock out of the Borefolio -- and said so here last night. This morning, I sold 100 SLR at a nice round $50 apiece. That was a good $1 3/4 shy of the stock's closing price, settling once again any questions about my intra-day trading abilities -- that is, any questions about whether I have any, which I clearly do not.

Solectron shares zoomed as high as $52 3/4, aided by an upgrade to "buy" from "neutral" by Alex. Brown analyst Jim Savage. Later in the day, however, Hambrecht & Quist downgraded Solectron to "buy" from "strong buy." In a research note, H&Q said the stock remains "an outstanding long-term investment" in light of the continuing trend toward outsourcing and Solectron's leadership position, but share-price appreciation may be somewhat limited. H&Q trimmed earnings estimates by two cents to $2.79 a share for fiscal 1997 (which ends in August) and to $3.45 from $3.60 for fiscal 1998, to reflect push-outs in the system integration business.

These differing reactions to yesterday's report coincide with my own ambivalence about the stock. As I noted yesterday, my decision to sell was based only partly on the company's prospects -- which I think will continue to be just fine over the long haul -- and somewhat more on considerations of the Borefolio's overall make-up.

Based on a net profit margin of 4.37% that Solectron enjoyed this past quarter and a share-count of around 61 million, earnings projections in the neighborhood of $2.75 per share for FY97 appear eminently plausible. Looking further ahead, the trend toward outsourcing of electronics assembly continues, and Solectron said in last night's conference call that it intends to increase further its capacity to take on such work, including a possible expansion into Mexico.

That's the good news -- and there's a lot of it, as today's jump in the stock price exemplifies.

On the other hand, I'm a bit concerned about the underperformance of the Force Computers acquisition -- underperformance resulting from the oft-cited weakness in Europe and the strong dollar. And I'm somewhat more concerned about the potential double-bind associated with Solectron's ramping-up of capacity to compete for high-volume systems assembly work. If the company is not more successful than it has been to date in winning such business, that additional capacity could become a burden. On the other hand, if Solectron does win more of the highly competitive systems assembly business, its operating margins will almost certainly decline -- which could well hurt the stock, even if the business decision was a sound one.

The Solectron folks are very sharp, and they may well negotiate this tricky transition successfully. That the transition is tricky, however, cannot be denied; and as the H&Q advisory suggests, there's not a lot of room in the multiple now to cushion a slip.

I'd be more inclined to accept the risk in Solectron were it not for the fact that the Borefolio is already exposed to the same general risk environment with CISCO SYSTEMS (Nasdaq: CSCO) and, to a somewhat lesser degree, ORACLE CORP (Nasdaq: ORCL). Even two months ago, this was risk I was delighted to assume. Now, beaten badly about the head and shoulders with technology losses, I'm inclined to trim the Borefolio's "tech" profile just a bit.

One way to reduce exposure to technology in a portfolio is not to sell technology holdings but to buy non-technology stocks, thereby diluting the tech stuff. Unlike most personal portfolios, however, the Borefolio gets no fresh infusions of funds with which to enact that strategy. If I want to buy something for the Borefolio, I have to sell something else. So the question boils down to: What to sell?

For me, Cisco stays. Shedding Oracle was something I considered, but somewhat to my own surprise I've found myself increasingly warming to the notion that Oracle may really be onto something with this "thin client" concept.

Also, Oracle obviously overlaps less with Cisco and Solectron than the latter two do with each other. In fact, no small part of the reason why Solectron had such a good quarter -- and expects such a good second half -- is precisely because of the robustness of its business from networking infrastructure customers -- such as H-P, Bay Networks, Cisco, 3Com, and others. (Yet the networking stocks are getting walloped!)

The point of all my thinking out loud here is absolutely not to convince you to buy or sell Solectron -- or Cisco or Oracle or anything else. The point is to offer for your consideration a real-time glimpse into the kinds of issues that your basic individual investor must grapple with from time to time. My intention -- and the intention of all of The Motley Fool -- is to invite and encourage an ongoing conversation about how to deal with such issues, not resolve it. That's what this interactive medium is all about, yes?

So if I screwed up -- and certainly today's price action suggests that maybe I got the story wrong -- well, that's every bit as educative (for me and for you) as if I got it right, perhaps even more so.

Since today's topic appears to be the Borefolio's tech holdings, let me add a word about Cisco. Although the stock managed a $1 1/4 gain today, it is still more than 20 points off the high it set late last year. According to fresh numbers from First Call, eight of 33 analysts who follow the stock have trimmed their earnings forecasts in the past month -- five of them in the past week alone.

Three short months ago, analysts were predicting that Cisco would earn $2.08 per share for the company's fiscal year ending in July. As for FY98, the consensus forecast at that time was $2.74.

As of today, however, the consensus estimate for FY97 has contracted all the way back to, uh, ... $2.09? Looking ahead to FY98, however, the consensus estimate is ... still $2.74?

"Cute, Boring. And maybe you've got a point," the bears reply. "But the risk surrounding those estimates has ballooned noticeably in the last couple of months, so investors are merely discounting appropriately for it."

Perhaps so. After all, haven't you noticed how easy it's been to access and use AOL recently -- and how much faster Web access is, now that demand has slowed and supply has caught up? And haven't you also read about all those substantial cutbacks in spending plans announced recently by Internet service providers and telcos, both domestically and abroad?

Me neither.

(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       22.25
BGP   -  1/8   41.50
CSL   ---      31.50
CSCO  +1 1/4   50.38
GNT   ---      36.00
ORCL  -1 5/8   40.38
OXHP  -1 3/8   59.63
PMSI  +  5/8   11.38
TDW    + 3/8   44.63
                   Day   Month    Year  History
        BORING   +0.06%  -1.22%  -1.24%  13.64%
        S&P:     -0.76%  -0.15%   6.60%  27.03%
        NASDAQ:  -0.79%  -3.03%  -1.68%  21.94%

     Rec'd   #  Security     In At       Now    Change
  2/28/96  200 Borders Gr    22.51     41.50    84.34%
  5/24/96  100 Oxford Hea    48.02     59.63    24.15%
  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     11.38    12.97%
   3/5/97  150 Atlas Air     23.06     22.25    -3.51%
  6/26/96  100 Cisco Syst    53.90     50.38    -6.54%
 11/21/96  100 Oracle Cor    48.65     40.38   -17.01%
 12/23/96  100 Tidewater     46.52     44.63    -4.08%

     Rec'd   #  Security     In At     Value    Change
  2/28/96  200 Borders Gr  4502.49   8300.00  $3797.51
  5/24/96  100 Oxford Hea  4802.49   5962.50  $1160.01
   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   4550.00   $522.51
   3/5/97  150 Atlas Air   3458.74   3337.50  -$121.24
  6/26/96  100 Cisco Syst  5389.99   5037.50  -$352.49
 11/21/96  100 Oracle Cor  4864.99   4037.50  -$827.49
 12/23/96  100 Tidewater   4652.49   4462.50  -$189.99

                             CASH   $7635.47
                            TOTAL  $56822.87