Boring Portfolio

Boring Portfolio Report
Thursday, February 5, 1998
by Mark Weaver, MD (MWEAV@aol.com)


St. Louis, MO (Feb. 5, 1998) -- The markets cooled off today on what some called "profit taking" after the strength of the past few days. Economic reports continued to show that growth in the economy is under control. Factory orders dropped substantially and there were reports of increasing layoffs. Although this doesn't sound all that good (especially to those laid off), this is continued evidence of the low growth, low inflation mode that has fueled low interest rates and a raging bull market.

For the day the S&P 500 was off 0.33% while the Nasdaq fell 0.21%. The Boring portfolio dipped 0.72% with only one stock climbing. Not a single Boring holding moved even a full point.

In the news today was Cisco Systems (Nasdaq: CSCO) which benefited from an estimate upgrade from the analyst at BancAmerica Robertson Stephens. I note that the analyst raised 1998 estimates to $1.73 which is still a penny below the mean reported by First Call. Cisco's stock has been strong since reporting earnings Tuesday evening. However, today the stock took a breather, down $1/8. For Greg's report on the conference call click right here.

Carlisle Companies (NYSE: CSL) reported earnings that easily surpassed estimates today. For the quarter the company earned $0.54 per fully diluted share versus estimates of $0.51. This represents a 29% increase over last year. The market shrugged off this news and the stock closed down $1/4.

Greg listened in to the very upbeat conference call. He reports that all three business segments (Construction materials, Transportation, and General Industry) continue to show strong order backlogs. The company is planning to increase capacity to meet production requirements. In spite of these capital expenses the company expects to increase gross margins this year because of changes in product mix, operating efficiencies and the contribution of new acquisitions.

These new acquisitions did not bring anything to the bottom line in the current quarter. The best is yet to come!

Carlisle reports that its exposure to the "Asian flu" is minimal. While there has been some price competition from Asia in the container and tire segment, Carlisle has fended that off with its own tire operations in China and Trinidad. Carlisle was the recipient of a very large container order late last year as well.

Carlisle has stated that it is targeting growth at 15% for the top and bottom line and is confident that it will achieve that growth in 1998. This is an ideal Boring company.

For those interested in listening to the conference call, it can be heard until 5PM tomorrow by calling: 800-633-8284. The access code is: 3654528.

One of the columnists I most enjoy is Forbes contributor David Dreman. He is the author of the book The New Contrarian Investment Strategy. In a recent column he presented some interesting information on the hidden risk of "buying the best". There are some that believe the best way to invest is to find leading companies and buy them, period. These purchases are made without regard to PE or any other measure of valuation. The basic gyst of the rationale is that even though the stocks are overvalued, they will eventually "grow into" their price. The underlying belief is that the best will continue to be the best. In some cases this will undoubtedly work out very well, however, data would suggest that the most likely outcome is less sanguine.

Dreman presented data from two very interesting studies that put cold water on this "buy the best" concept. These two studies, when combined, look at the returns for the Fortune magazine list of the Ten Most Admired Companies over a 23 year period. As it turns out in the first study (done by Dreman) the stocks of these "admired" companies underperformed the general market by 35% from 1972 through 1982. Professors Shefrin and Statman of Santa Clara University followed up on Dreman's study and looked at the Most Admired companies from 1982 through 1995 and reported that these stocks were, on average, the worst-performing stocks over that time span. Investors bid up the stocks of these premier companies to levels of valuation that were unsustainable.

The new Fortune list comes out in March. I am anxious to see it. Last year's included Microsoft, Coca-Cola and Intel. While Microsoft beat the market last year (up 56%) the other two lagged the S&P 500, up 27% and 7.4% respectively. These are fine companies, no doubt. But are they fine investments going forward?...The jury is still out.

Benjamin Graham is quoted as saying "Buying the best issue is like betting on the top-heavy favorite in a horse race. The chances may be on your side, but the odds are heavily against you."

In Dreman's studies, the stocks that performed best were those that were out of favor and generally less conspicuous. They are also safer with a more limited downside should bad news be forthcoming.

We are looking for some new buys and I seriously doubt any of them will be on Fortune's list in March. Boring stocks, like Carlisle, tend to stay off of high profile lists and that's just fine with us.

FoolWatch -- It's what's going on at the Fool today.


TODAY'S NUMBERS
Stock  Change    Bid 
 ANDW  -  7/8   28.25 
 CGO   +  5/16  23.25 
 BGP   -  7/16  32.00 
 CSL   -  1/4   46.31 
 CSCO  -  1/8   64.38 
 FCH   -  3/8   36.63 
 
                   Day   Month    Year  History 
         BORING   -0.72%  2.77%  -2.46%  22.73% 
         S&P:     -0.33%   2.37%   3.41%  61.44% 
         NASDAQ:  -0.21%   2.55%   6.78%  61.09% 
  
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     32.00   184.29% 
   6/26/96  150 Cisco Syst    35.93     64.38    79.15% 
   8/13/96  200 Carlisle C    26.32     46.31    75.93% 
   1/21/98  200 Andrew Cor    26.09     28.25     8.28% 
    3/5/97  150 Atlas Air     23.06     23.25     0.83% 
   11/6/97  200 FelCor Sui    37.59     36.63    -2.57% 
  
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  12800.00  $8297.51 
   6/26/96  150 Cisco Syst  5389.99   9656.25  $4266.26 
   8/13/96  200 Carlisle C  5264.99   9262.50  $3997.51 
   1/21/98  200 Andrew Cor  5218.00   5650.00   $432.00 
    3/5/97  150 Atlas Air   3458.74   3487.50    $28.76 
   11/6/97  200 FelCor Sui  7518.00   7325.00  -$193.00 
  
                              CASH  $13182.97 
                             TOTAL  $61364.22