St. Louis, MO/Phoenix, AZ (January 28, 1998) - As you can tell, I am traveling today so, there won't be a current events section to this report. Greg got some R&R in Phoenix last weekend and now it is my turn. By the time you read this I should have 18 holes under my belt and a smile on my face. Nothing like a winter break in a sunny clime to give me a little boost.
The last two days have been a boost for the Borefolio and I hope today turned out the same. The S&P and the Nasdaq were up less than 1%, while the Borefolio split the difference between the two.
Yesterday Greg announced that he was Selling Tidewater (NYSE: TDW) and Selling Green Tree (NYSE: GNT). Both stocks were sold today; Tidewater at $41 7/8 and Green Tree at $19 1/8 (minus an $18 commission for each trade).
While a bullish argument can be made for both companies, an equally compelling bearish argument can follow. That is true for just about any stock and that is what makes markets. The underlying problem for Greg and I is that these stocks were just not making the "Boring" grade.
In the case of Tidewater, much of the volatility in the stock was related to oil prices. I would submit that oil futures are decidedly unBoring and I found myself looking at the price of West Texas crude a little too often for my enjoyment.
Green Tree turned out to be very unBoring. When the Borefolio bought Green Tree the term "gain on sale" accounting was relegated to accounting obscurity. Even the bean counters at Standard & Poors and Moody's were taken by surprise by the accounting mess at Green Tree. It is difficult to be at peace with accounting that even the pros don't understand. While making loans to the manufactured housing industry sounds boring, the accounting of those loans was much too complicated.
The idea behind the Borefolio is to find high quality companies in easily understandable industries. A Boring stock won't find itself hyped on the message boards. Rarely will a Boring stock sport triple digit earnings gains or sport triple digit PE ratios. In the early days of the Boring Stock folder names like Park Electrochemical, Florida Rock, Texas Industries, Potash of Saskatchewan and AK Steel were the subjects of conversation. Those stocks were and remain, pretty Boring.
While Tidewater, Green Tree and Oxford Health Plans (NYSE: OXHP) looked Boring at the time of purchase, subsequent events raised the pulse a bit, no? Of those three only Tidewater's relationship to oil was a predictable source of volatility. Oxford may have misled investors and Green Tree didn't provide adequate information for an investor to properly see the risks in its accounting practices. It is much easier to understand crushed rock, steel mills and fertilizer.
So, enough about the past... we are moving to the future.
A couple of weeks ago Greg put out a call for readers to submit their favorite Boring stock and we got some good ideas. I'll take a look at a couple of them.
First up, the decidedly boring AlliedSignal (NSYE: ALD). This is a huge company with annual sales over $14 billion. It is a member of the Dow Jones Industrial Average as well. Its business you ask?
The company makes aerospace components, automotive parts and engineered materials (chemicals, plastics, polymers and fibers). This is a good Boring product line. While sensitive to the business cycle, this company is well diversified and can be expected to weather cyclical storms.
Allied just reported record earnings in the 4th quarter. This was the 24th straight quarter of earnings growth 14% or greater. The company increased the dividend 15% and this was the 6th straight year of increasing dividends. On top of that, the company reported that operating margins expanded a bit over the past year. Now, this isn't razzle dazzle triple digit earnings growth but this tortoise has beaten a whole lot of hares.
S&P reaffirmed its single A rating of Allied's debt and here's what they had to say about the company.
"AlliedSignal's ratings are supported by strong competitive positions in aerospace, engineered materials, and automotive markets, as well as a good financial condition characterized by solid profitability and cash flow generation. Stability is enhanced by diversity of products and customers, significant aftermarket sales, and generally rising international revenues. While improving performance in recent years has resulted from ongoing actions aimed at higher productivity, there also has been an increased emphasis on growth through selected acquisitions, new products, and globalization."
No doubt about it, Allied is Boring. But, is it a good stock to buy now? A quick glance at my Morningstar database shows me that Allied is currently trading at 9 times cash flow, a 3 year low. It is trading at a price/sales ratio of 1.6, a 3 year low. And, it is trading at its average price to book ratio. On top of that, if you look at how much cash the company generates for each dollar invested, the cash-on-cash return, you get a 6.5% return. In essence, if you bought the whole company as if it were a bond, you'd be getting a 6.5% tax free return, not bad at all. Anything over 5% is an excellent number.
We are going to take a closer look at AlliedSignal. You can join along. A good place to start would be the AlliedSignal Corporate Home Page.
Another suggestion was Avery-Dennison (NYSE: AVY). It happens that Avery Dennison reported earnings this week and they did not disappoint. Earnings were up 18%, to record levels. For the fiscal year the company reported record EPS, Net Income, Return on Equity and Capital. Here's what the CEO had to say in the earnings report:
"1997 was a highly successful year for Avery Dennison on all fronts. Our steady earnings growth and impressive returns, combined with the increase in unit volume and operating margin improvement, made this year one of the most profitable in our history. We introduced our market-leading brands into new global markets, and we launched a variety of innovative new products."
So, what does this company do? They make labels, tapes, office products and specialty chemical adhesives. This is an excellently boring product line.
Like AlliedSignal, the company is a steady performer. Sales and earnings have increased in each of the past 6 years and in 15 of the last 17 years. The dividend has gone up 17 years straight!
This outstanding performance has not gone unnoticed by investors. The company is selling at 5 year high levels for PE, PSR, Price/cash flow and Price/Book. The company looks expensive on an earnings growth basis as well. So, while Avery is a Boring company, we might need a better price before it is a compelling buy.
We are still going to look further at this stock. More information is available at the Avery Dennison website.
That covers our A submissions. We will be looking at the rest as well. As
usual, we welcome additional suggestions. I hope you all are having as good
a day as I am! FORE!!
Stock Change Bid ANDW - 11/16 28.94 CGO + 5/16 22.00 BGP - 1/16 32.75 CSL --- 45.25 CSCO +1 7/8 63.75 FCH + 9/16 37.31
Day Month Year History BORING +0.61% -2.34% -2.34% 22.89% S&P: +0.82% 1.55% 1.55% 58.54% NASDAQ: +0.54% 3.13% 3.13% 55.58% Rec'd # Security In At Now Change 2/28/96 400 Borders Gr 11.26 32.75 190.95% 6/26/96 150 Cisco Syst 35.93 63.75 77.41% 8/13/96 200 Carlisle C 26.32 45.25 71.89% 1/21/98 200 Andrew Corp 26.09 28.94 10.91% 3/5/97 150 Atlas Air 23.06 22.00 -4.59% 11/6/97 200 FelCor Sui 37.59 37.31 -0.74% Rec'd # Security In At Value Change 2/28/96 400 Borders Gr 4502.49 13100.00 $8597.51 1/21/98 200 Andrew Corp 5218.00 5787.50 $569.50 3/5/97 150 Atlas Air 3458.74 3300.00 -$158.74 8/13/96 200 Carlisle C 5264.99 9050.00 $3785.01 6/26/96 150 Cisco Syst 5389.99 9562.50 $4172.51 11/6/97 200 FelCor Sui 7518.00 7462.50 -$55.50 CASH $13182.97 TOTAL $61445.47