Boring Portfolio

Boring Portfolio Report
Monday, October 27, 1997
by Greg Markus (TMFBoring@aol.com)


ANN ARBOR, Mich. (Oct. 27, 1997) -- OXFORD HEALTH PLANS (Nasdaq: OXHP) chose one of the worst days in modern market history to announce that the company's performance would fall far short of analysts' expectations for the balance of this year and next year, as well. In making its warning this morning, Oxford displayed the same exquisite sense of timing that company founder and chairman Stephen Wiggins showed when he stepped aside as CEO in early August, just as shares of his company were hitting all-time highs.

On a day when most stocks were hit hard, Oxford was drawn and quartered ... well, thirded, anyhow. Nearly two-thirds of the company's market capitalization evaporated in a matter of hours, as OXHP plummeted $42 15/16 to $25 13/16. The stock easily topped the Nasdaq's most-actives list, trading an incredible 49 million shares -- over 62% of the outstanding stock.

In a press release, Oxford said it expects to report a charge to net earnings of $47-$53 million in the third quarter to beef up reserves for medical claims. In addition, the company warned that revenues would be below expectations due to delays in billings. As a result, Oxford expects to show a loss of $0.83 to $0.88 per share for the quarter. The Street had been expecting a profit of around $0.47 per share, according to numbers supplied by First Call.

"These adjustments recently came to the company's attention as a result of reviewing and reconciling previously delayed premium bills and medical claims," said Wiggins in the press release. It must have been awfully recently: less than two weeks ago, company execs were making upbeat presentations to investors.

That Oxford didn't know about the magnitude of its claims and billings problems until today strains credulity ... unless of course the company's now infamous information systems were so faulty that management literally had no idea what was coming in and what was going out.

Oxford also said it was increasing its estimates of future Medicare expenses and other administrative expenditures. These factors are expected to lower fourth quarter earnings to $0.25 to $0.27 per share, excluding a one-time gain expected from the sale of Health Partners Inc. Analysts' consensus forecast had been $0.50.

Finally, and most significantly, Oxford said that increased costs "will impact earnings estimates for 1998 by $0.60 to $0.80 per share." Since the old consensus estimate was for EPS of $2.47, this implies a revised 1998 figure of $1.67 to $1.87.

If you own Oxford, you may well be reeling tonight, as am I. What's done is done -- although probably not for certain lawyers already preparing suits against the company on behalf of certain shareholders. That aside, the questions before us now appear to be, first, "Has our confidence in management been so undermined that we simply want no part of the stock?" and, second, "Assuming that we aren't willing to sell at almost any price, has the sell-off in OXHP been overdone, and should we therefore hang around ... at least for a while yet?"

I don't pretend to have anything other than the most provisional of answers to either question, and I (and others, I'm sure) would be grateful to read what you think, if you're inclined to post in the Oxford Health folder, at the Fool's website or our location on AOL.

Question #1: Has confidence in management been so undermined that we want no part of the stock?

A: Put bluntly, damned close to it. Words like "shock" and "blind-side" were being used by industry analysts to describe today's announcement. The enormous trading volume in OXHP suggests that a number of big institutions decided to pull the trigger first and ask questions later. That's a perfectly understandable reaction -- and not an unjustified one. I, for one, will second-guess no one who sold today, or sells tomorrow. For the moment, though, I'm going to wait a bit and seek clarification ... in no small part because of my answer to Question #2, below.

Question #2: Is the sell-off overdone?

A: That depends upon what multiple you're willing to assign the stock. (I know I'm stating the obvious here.) If you take $1.75 as a point estimate and assign a market multiple to it, you're at maybe $36 as a near-term target. If you believe, as some apparently do now, that Oxford merits no more than an "insurance company" multiple, you're at around 14 x $1.75 = $24.50.

So if -- and it's no small "if" -- you're willing to believe that the bad news is now all on the table, then the remaining downside would appear to be quite limited. On the other hand, the upside may take a while getting realized, if Oxford has seriously injured its reputation among analysts, which it may well have.

Oxford Health is slated to report third-quarter results on Wednesday, Nov. 5, with a conference call to follow. In light of what I see to be a fairly limited further downside, I'm inclined to hold, at least until I hear what management has to say for themselves.

Oh, by the way, CISCO SYSTEMS (Nasdaq: CSCO) announced two new products in their rapidly growing line of dial access products. The AccessPath TS3 and AccessPath-LS3 are carrier-class integrated dial access systems intended for Internet service providers and large enterprises. The TS3 scales from 192 to 2,016 ports in North America and from 240 to 2,520 ports in worldwide E-1 configurations, and it is designed to support more than 5,000 ports in the future. The LS3 is scalable from 96 to 384 ports in North America and from 120 to 480 ports in worldwide E-1 configurations.

These are high-end, big-ticket items. The LS3 will be available for delivery next month at a base price of $55,700. The TS3 is priced at $130,900, with initial shipments scheduled for early next year.

Meantime, BORDERS GROUP (NYSE: BGP) announced planned openings of four new superstores for 1998, three in California and one in Ohio. Needham also upgraded the stock to "strong buy" from "buy" today.

Finally, the weakness in stocks is causing a flight to quality into the U.S. bond market, which should help companies such as GREEN TREE FINANCIAL (NYSE: GNT) that offer high-quality asset-backed securities to investors.

Fat lot of good this news did for any of these stocks today. Cisco fell $7 5/16, Borders dropped $1 1/3, and Green Tree was trimmed by $3 3/4.

Once the dust settles -- and it will -- there will be some terrific bargains lying on the floor.


TODAY'S NUMBERS
Stock  Change    Bid
ATLS  -2 1/2   23.38
BGP   -1 1/2   24.50
CSL   -2 5/16  42.50
CSCO  -7 5/16  72.88
GNT   -3 3/4   41.88
ORCL  -2 11/16 31.25
OXHP -42 15/16 25.81
PMSI  -1 5/8   11.63
TDW   -4 1/2   61.19
                   Day   Month    Year  History
        BORING  -12.06% -13.10%  10.43%  27.07%
        S&P:     -6.87%  -7.42%  18.39%  41.08%
        NASDAQ:  -7.02%  -8.93%  18.90%  47.47%

     Rec'd   #  Security     In At       Now    Change
  2/28/96  400 Borders Gr    11.26     24.50   117.66%
  8/13/96  200 Carlisle C    26.32     42.50    61.44%
   2/2/96  200 Green Tree    30.39     41.88    37.80%
  6/26/96  100 Cisco Syst    53.90     72.88    35.20%
 12/23/96  100 Tidewater     46.52     61.19    31.52%
   3/8/96  400 Prime Medi    10.07     11.63    15.46%
   3/5/97  150 Atlas Air     23.06     23.38     1.37%
 11/21/96  150 Oracle Cor    32.43     31.25    -3.65%
  5/24/96  100 Oxford Hea    48.02     25.81   -46.25%


    Rec'd   #  Security     In At     Value    Change
  2/28/96  400 Borders Gr  4502.49   9800.00  $5297.51
  8/13/96  200 Carlisle C  5264.99   8500.00  $3235.01
   2/2/96  200 Green Tree  6077.49   8375.00  $2297.51
  6/26/96  100 Cisco Syst  5389.99   7287.50  $1897.51
 12/23/96  100 Tidewater   4652.49   6118.75  $1466.26
   3/8/96  400 Prime Medi  4027.49   4650.00   $622.51
   3/5/97  150 Atlas Air   3458.74   3506.25    $47.51
 11/21/96  150 Oracle Cor  4864.99   4687.50  -$177.49
  5/24/96  100 Oxford Hea  4802.49   2581.25 -$2221.24

                             CASH   $8028.59
                            TOTAL  $63534.84