Boring Portfolio

Boring Portfolio Report
Wednesday, December 3, 1997
by Greg Markus (TMF

ANN ARBOR, Mich. (Dec. 3, 1997) -- The Boring Portfolio posted its third consecutive advance Wednesday, rising 0.32%. That gain lagged those of the S&P 500 and Nasdaq, however, owing to the continued wilting of Green Tree Financial (NYSE: GNT). Green Tree fell $1 3/8 in the kind of above-average trading that has recently become almost routine.

Last night, two law firms announced that they had filed a class-action lawsuit against Green Tree, its officers and directors, on behalf of certain purchasers of the company's stock. The suit alleges that Green Tree misrepresented and/or omitted material information concerning its financial condition and accounting policies prior to the company's announcement on Nov. 13 that fourth-quarter earnings would be reduced as a result of an unanticipated addition to reserves of $125 to $150 million.

The addition to reserves, you may recall, was necessitated by higher-than-expected prepayments of certain manufactured housing loans that Green Tree issued in 1994 and 1995. The stock has lost approximately a quarter of its value in the days since the Nov. 13 announcement, and it is off more than 40% from its recently established record high.

Today, some Philadelphia lawyers announced that they were also filing a class-action suit against Green Tree. Green Tree thus shares with former Borefolio holding Oxford Health Plans (Nasdaq: OXHP) the dubious distinction of having multiple class-action lawsuits outstanding against it.

Green Tree and Oxford are featured (if that's the word for it) in a series of cover stories in the Dec. 15 edition of Forbes. Gretchen Morgenson's articles shed some much-needed light on the investigative laxness and conflicts of interest that increasingly result in less-than-critical stock coverage by highly paid industry analysts.

Morgenson points out that nearly all the analysts following Green Tree failed to press the company to disclose certain key assumptions underlying its controversial (but mandatory) "gain-on-sale" accounting. The article offers an explanation for the analysts' behavior:

"A rosy research report can mean the difference between winning the lucrative manager's spot on a debt or equity offering for a company and not participating in the underwriting at all. Green Tree, with its constant stream of mortgage securitizations -- $4 billion in loans were originated in 1997 alone -- is an enormous source of banking fees to Wall Street."

Being only an individual investor myself and not at all a specialist in the complexities of gain-on-sale accounting, I assumed that the analysts had done their homework on Green Tree. I care little about analysts' pointless "buy/sell/hold" recommendations, but I do pay attention to their earnings projections and the reasoning they offer to justify those projections. The fact that analysts' estimates were routinely met or exceeded by Green Tree bolstered my confidence in the quality of the analysts' work.

Having lived first-hand through the experiences with Green Tree and Oxford Health that Morgenson writes about, I understand now that my presumptions were unfounded. Analysts, it turns out, are a lot like doctors, plumbers, and bus drivers: some of them are masters of their trade and as reliable as human frailty permits, others are hacks, or worse.

It's taken this individual investor until nearly the age of 50 to learn that lesson. If you learned it sooner than I, then you're so much the better for it.

I sold the Borefolio's investment in Oxford Health soon after that company dropped its bombshell. But I've held on to Green Tree. Why so?

Before answering that question, let me say that I don't rely only on what analysts say. I read every SEC filing of every company in the Borefolio. I scan for news about them daily. I try to touch base with them every few months -- or more frequently if I have questions or concerns. And I cover every quarterly conference call, either the live call or a taped replay. That sounds like a lot of work -- and it is, sometimes, but it's not beyond the capacity of a person with a full-time job and family (as I have), provided that you don't stretch yourself too thinly across too many stocks. Even with Mark Weaver's able help, eight to ten issues is the max for me.

So, based not only on what analysts say but also on my own due diligence (and some overdue diligence, as it turns out), I concluded that Oxford's challenges were likely to be far more long-lasting and difficult to overcome than Green Tree's are.

In Green Tree's case, the company has now changed its previous policy of not disclosing the important loan default and prepayment assumptions that it uses when booking gains on sales. Over the past few quarters Green Tree has also been more forthcoming in providing current information about how its various loan pools are performing.

As for the recent addition to reserves, there are good reasons to conclude that this resolves the prepayment problem, barring any dramatic drops in interest rates in the coming year. And should those declines occur, at least now investors will have a clearer view of their impact on Green Tree's earnings. (Note: I'm well aware that Steven Eisman, the analyst at Oppenheimer who is the hero of Morgenson's article, disagrees with the conclusion I offer here. I'll take up this matter in another Boring recap, soon.)

Moreover, it's worth bearing in mind that gain-on-sale issues aside, there are many other indicators that Green Tree's business is thriving. In terms of new loan originations, the company continues to gain market share in the manufactured home business, and its newer home improvement, office equipment, and secured credit card programs are going great guns. Beyond that, it seems that hardly a week goes by without Green Tree announcing some new business development, such as the exclusive financing deal with Winnebago (NYSE: WGO) that it celebrated yesterday.

The Borefolio is not wedded to any stock. (Well, maybe Cisco.) But we're going to hang on to Green Tree, believing that the company will recover from this (self-inflicted) setback fairly soon.

Stock  Change    Bid
CGO   +  3/16  27.56
BGP   +  9/16  29.63
CSL   -  1/8   43.31
CSCO  +  3/8   86.88
FCH   -  1/2   35.50
GNT   -1 3/8   29.31
ORCL  -  3/16  30.19
PMSI  +  1/4   13.56
TDW   +2 7/16  59.31

                   Day   Month    Year  History
        BORING   +0.32%   0.36%  13.32%  30.40%
        S&P:     +0.52%   0.21%  31.86%  57.13%
        NASDAQ:  +0.54%  -0.96%  25.10%  55.16%

    Rec'd   #  Security     In At       Now    Change
  2/28/96  400 Borders Gr    11.26     29.63   163.19%
  8/13/96  200 Carlisle C    26.32     43.31    64.53%
  6/26/96  100 Cisco Syst    53.90     86.88    61.18%
   3/8/96  400 Prime Medi    10.07     13.56    34.70%
 12/23/96  100 Tidewater     46.52     59.31    27.49%
   3/5/97  150 Atlas Air     23.06     27.56    19.53%
   2/2/96  200 Green Tree    30.39     29.31    -3.54%
  11/6/97  200 FelCor Sui    37.59     35.50    -5.56%
 11/21/96  150 Oracle Cor    32.43     30.19    -6.92%

    Rec'd   #  Security     In At     Value    Change
  2/28/96  400 Borders Gr  4502.49  11850.00  $7347.51
  8/13/96  200 Carlisle C  5264.99   8662.50  $3397.51
  6/26/96  100 Cisco Syst  5389.99   8687.50  $3297.51
   3/8/96  400 Prime Medi  4027.49   5425.00  $1397.51
 12/23/96  100 Tidewater   4652.49   5931.25  $1278.76
   3/5/97  150 Atlas Air   3458.74   4134.38   $675.64
   2/2/96  200 Green Tree  6077.49   5862.50  -$214.99
 11/21/96  150 Oracle Cor  4864.99   4528.13  -$336.87
  11/6/97  200 FelCor Sui  7518.00   7100.00  -$418.00

                             CASH   $3021.10
                            TOTAL  $65202.35