Boring Portfolio

Boring Portfolio Report
Wednesday, January 7, 1998
by Greg Markus (

ANN ARBOR, Mich. (Jan. 7, 1998) -- What was shaping up to be a downright ugly session for U.S. stocks Wednesday ended only modestly lower for the Dow and S&P 500, thanks to a last hour buying spree. Not so for the Nasdaq, however, as miscellaneous earnings warnings dropped the Naz for a 1.17% loss.

Green Tree Financial (NYSE: GNT) wilted another dollar, as financial stocks came under pressure. For companies like Green Tree, the concern is that sub-6% interest rates could spark higher than anticipated refinancing of mortgage and home equity loans.

As you may well recall, the Tree warned in November that it would take a pretax charge of $125-$150 million to write down the value of certain manufactured home (MH) loan securitizations because of accelerating prepayments last year. Executives at Green Tree have insisted that these charges are more than sufficient to deal with the problem and that they've increased their prepayment assumptions on newer loans. They've backed up their claims with a steady spate of insider buying in the past two months.

At least some analysts believe that additional writedowns could be in the offing, however -- if not for Green Tree then for some other finance companies that use gain-on-sale accounting. If that were to happen, Green Tree could get whacked again, just for good measure. If you hold Green Tree, then you should be prepared for that possibility.

The uncertainty should be cleared up substantially in about three weeks, however. Green Tree will report fourth-quarter results then, and management will almost certainly discuss at some length their projections for the coming year -- and what those projections are based upon.

Just as investors should be aware of the downside risks in Green Tree, so should they take into account the upside potential. The company engaged in a whirlwind of loan securitizations in the fourth quarter, including a last minute securitization of a bundle of office equipment financings. Loan originations in the newer business lines are likely to be very strong in the Q4 results, and even the more mature MH finance business could show solid growth if the recent pickup in new home sales is any indication.

Moving on, energy exploration and production stocks bounced back today. Tidewater (NYSE: TDW) rose $1 3/6 in exceptionally heavy trading in excess of 3.4 million shares.

I've not seen any recent comments from folks at Tidewater, but the chairman, president and CEO of industry-mate Hvide Marine (NYSE: HMAR), J. Erik Hvide, sent a letter to shareholders of that company recently, and it has been making the rounds on the Internet.

In the letter, Hvide (pronounced "VEE-dah" -- and no relation to Rula Lenska, as far as I know) writes that it is "disconcerting to see such price erosion" in stock of his and other oil service companies "when, in fact, all of the fundamentals driving our industry are as strong as ever."

"The supply/demand equation has not changed," Hvide continues. "Workboats remain in very tight supply, and newbuildings are targeted toward the fast-growing deepwater segment of the market. A similar situation prevails in the market for offshore drilling rigs, where there is virtually 100% utilization and, given the record-setting pace of recent lease sales, there is every reason for optimism about the future."

He concludes, "As we took ahead to 1998, we remain confident that the combined forces of El Nino, the 'Asian flu,' higher OPEC production ceilings, uncertainty in Iraq and elsewhere, and weekly rumors about this or that energy company cutting back on E & P spending will be dispelled by the continued strength of the market for oilfield equipment and supplies, both domestically and internationally. Shakeouts such as we have experienced in the last several weeks can be therapeutic in stripping away so-called 'momentum' players and leaving behind long-term investors."

Now I'm not claiming that one should believe everything is hunky-dory in the oilpatch simply because Mr. Hvide says so. I am suggesting, though, that perhaps he has a perspective worth taking into account in the midst of what has all the markings of indiscriminate panic selling in oil services stocks.

Finally, we finish up the prospective run-down of Borefolio holdings that we commenced last week. FelCor Suites Hotels (NYSE: FCH) sneaked up $1/16 today. What better occasion to remind ourselves that this most recent Borefolio investment is quietly earning its 6.1% annual dividend even as the share price has been more or less napping?

The stock may have taken a siesta, but the company has not. A few weeks after we purchased our 200 shares of FCH in early November, FelCor acquired the 309-room Sheraton property in Burlington, Vermont for a cool $31 million. FelCor then marked the end of 1997 by snapping up a Doubletree Guest Suites Hotel in Dayton, Ohio for $11.3 million, roughly half in cash and half financed by debt.

According to the latest survey of analysts by First Call, FelCor is expected to generate funds from operation (or FFO -- the industry benchmark, similar to "cash flow") of $3.32 for 1997 and $3.80 for 1998. Using a multiple of 11 as a rough guide suggests a six-month target price in the neighborhood of $42 -- a neighborhood with which the stock is already familiar, by the way. That target would represent a 15.7% gain in the share price... plus there's that fine dividend.

In today's turbulent markets, one could perhaps do far worse than hunker down in a nice hotel for a spell, huh?

Stock  Change    Bid 
 CGO   +  1/8   25.44 
 BGP   -  3/8   29.81 
 CSL   -  1/4   43.13 
 CSCO  -1 3/4   55.44 
 FCH   +  1/16  36.31 
 GNT   -1       25.13 
 PMSI  -  1/8   12.63 
 TDW   +1 3/16  47.75 
                   Day   Month    Year  History 
         BORING   -0.91%  -2.69%  -2.69%  22.44% 
         S&P:     -0.27%  -0.66%  -0.66%  55.08% 
         NASDAQ:  -1.17%  -0.55%  -0.55%  50.02% 
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     29.81   164.85% 
   8/13/96  200 Carlisle C    26.32     43.13    63.82% 
   6/26/96  150 Cisco Syst    35.93     55.44    54.28% 
    3/8/96  400 Prime Medi    10.07     12.63    25.39% 
    3/5/97  150 Atlas Air     23.06     25.44    10.32% 
  12/23/96  100 Tidewater     46.52     47.75     2.63% 
   11/6/97  200 FelCor Sui    37.59     36.31    -3.40% 
    2/2/96  200 Green Tree    30.39     25.13   -17.32% 
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  11925.00  $7422.51 
   8/13/96  200 Carlisle C  5264.99   8625.00  $3360.01 
   6/26/96  150 Cisco Syst  5389.99   8315.63  $2925.64 
    3/8/96  400 Prime Medi  4027.49   5050.00  $1022.51 
    3/5/97  150 Atlas Air   3458.74   3815.63   $356.89 
  12/23/96  100 Tidewater   4652.49   4775.00   $122.51 
   11/6/97  200 FelCor Sui  7518.00   7262.50  -$255.50 
    2/2/96  200 Green Tree  6077.49   5025.00 -$1052.49 
                              CASH   $6427.47 
                             TOTAL  $61221.22