Boring Portfolio

Boring Portfolio Report
Tuesday, February 24, 1998
by Greg Markus (TMFBoring@aol.com)


ANN ARBOR, Mich. (Feb. 24, 1998) -- In his comments to Congress today, Fed chairman Alan Greenspan reminded legislators and investors alike that the financial turmoil in Asia remains a challenge to the U.S. economy, short attention spans here at home notwithstanding.

The S&P 500 and Nasdaq reacted by dropping approximately three-quarters of a percent in value, and the Boring Portfolio fell with them by a like amount.

Rather than discuss news about the Borefolio's current holdings -- of which there was precious little today -- tonight's recap sums up what my partner Mark Weaver and I have been thinking and doing with regard to our little portfolio over the past few months... and what we plan to be doing going forward. Sort of a Borefolio quarterly conference call, I guess.

Since late last year, Mark and I have actively searched for stocks in which to invest the Borefolio's cash balance. Between our own research and some excellent recommendations from the greater community of Motley Fool participants, we've developed a long list of companies that would fit nicely in the Borefolio.

In late December, I offered Newell Corp. (NYSE: NWL) for consideration. As you may recall, Newell has grown over the years into a manufacturer and distributor of brand name consumer products to mass merchandisers like Wal-Mart (NYSE: WMT) and Target. Newell is Uni-ball, Sharpie, Eberhard Faber and Berol pens, pencils and markers, Stuart Hall school supplies, Levolor blinds, Ace combs, Bulldog hardware, four of five brands of picture frames, Mirro and Wearever cookware, BernzOmatic torches... and I've barely scratched the surface.

Newell's a real powerhouse of a company: solidly profitable, the class of its field, intelligently managed, pays a modest dividend, the whole nine yards. Perfect Borefolio material.

In January, we discussed a few other companies seemingly made to order as Boring investments. One was Danaher (NYSE: DHR). Danaher makes Craftsman tools for Sears as well as Jake Brakes for trucks, and a variety of environmental controls and related products. Danaher also reliably cranks out profit growth in the mid- to upper teens, offers a small dividend, and has a sparkling balance sheet.

Danaher recently announced that it would acquire Pacific Scientific (NYSE: PSX), and the Street responded by pushing DHR into record territory. DHR's chart over the course of the '90s looks like it was drawn with a ruler running from the southwest corner of the page to the northeast.

Then there's Cintas Corp. (Nasdaq: CTAS), which was nominated by a participant in The Motley Fool's Website. Cintas sells and rents uniforms of all kinds. Nearly all of their business is in the U.S., but they are increasing operations in Canada. Asian exposure is zilch. Cintas's annual earnings growth is consistently in the high teens, and the stock pays a small dividend, as well. The balance sheet is rock solid.

We got lots more.

Avery Dennison (NYSE: AVY) makes stuff for sticking stuff to other stuff: tapes, adhesives, office labels of all kinds, and the new self-adhesive postage stamps. Return on equity is in the low 20s. Pays a moderate dividend. Sub-market beta to help smooth out the bumps in one's portfolio.

There's a slew of furniture companies that are capitalizing on the trend toward upgrading the family cocoon, the growth in home offices, and the interest in ergonomic furniture and workgroup arrangements in the corporate world. Check out Ethan Allen (NYSE: ETH), Herman Miller (Nasdaq: MLHR), HON Industries (Nasdaq: HONI), or the recently IPO'd Steelcase (NYSE: SCS). The last was ably reviewed by TMF's own Jim Surowiecki recently.

Cement is solid. Demand reliably outstrips domestic supply, it's terrifically expensive to open new plants at home, and it costs a ton to import the stuff. Former Borefolio occupant TXI (NYSE: TXI) has seen its stock more than double off summer lows induced by abysmal Texas weather. TXI (the former Texas Industries) also produces high-quality lightweight steel beams through its wholly-owned Chaparral minimill operation.

How 'bout financial services -- something to fill the whole left in the Borefolio when Green Tree Financial (NYSE: GNT) was ripped out by its roots? How about Automatic Data Processing (NYSE: ADP), the nation's largest payroll and tax-filing processor? Or Paychex (Nasdaq: PAYX), which toils profitably -- very profitably -- in the same field? Or the two federally-chartered twins: Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FNM)?

The Borefolio is not at all averse to holding a proper helping of technology stocks in its sack. Some Microsoft (Nasdaq: MSFT) or Intel (Nasdaq: INTC) would fit nicely alongside our Cisco (Nasdaq: CSCO) shares.

Other computer-related companies that satisfy Boring criteria of outstanding products, excellent management, and reliable profits include EMC Corp. (NYSE: EMC), BMC Software (Nasdaq: BMCS) -- catchy names, huh? -- and, of course, Hewlett-Packard (NYSE: HWP): Boring to the bone.

Compuware (Nasdaq: CPWR) is perhaps one of the few red-hot Year 2000 companies that could be called Boring. Compuware will still be making lots of money in 2001 and beyond, thanks to its fine array of software tools and even finer systems consultants. Heck, it's even located in Michigan.

Moving to the medical side, a number of outstanding companies immediately come to mind, including the Drip Portfolio's Johnson & Johnson (NYSE: JNJ), the Cash King Portfolio's Pfizer (NYSE: PFE), and our own favorites: Merck (NYSE: MRK), Abbott Labs (NYSE: ABT), and Medtronic (NYSE: MDT).

A few lesser-known names of Boring interest on the medical front include Arrow International (Nasdaq: ARRO) --aptly named since it makes catheters, implantable pumps, and other things that get stuck inside you -- and Becton, Dickinson (NYSE: BDX), which makes a broad line of medical, surgical, and laboratory products, including a new Unijet pre-filled syringe that could see strong sales in less-developed countries.

With all these great companies to invest in, why then hasn't the Borefolio, uh, gotten its act in gear, to put it charitably?

Fair question.

The answer, in a word, is valuation. We're aware that our concern about such mundane matters as how much one actually pays for a dollar's worth of earnings (or cash flow, free or otherwise) may tag us as being distinctly Old School. We have no wish to spoil the party -- and the Borefolio's performance to date certainly provides little evidence to support our concerns -- but we are what we are.

We're simply constitutionally unable to pay up 25 or 30 or 40 or more (!) times the coming year's earnings for the stock of any company --any company -- that is projected to grow earnings at a rate in the mid-teens, or even lower... sometimes a lot lower.

Our friends in the neighboring Cash King Portfolio argue that if one's time horizon is long enough, valuation is of relatively minor concern provided one is investing in the handful of companies that have demonstrated a superior capacity to produce profits at a good pace year after year after year.

We agree. Perhaps it has to do with our age (the Borefolio partners see the Big 5-0 looming squarely in their windshields) or perhaps it has to do with our intellectual inability to project the fortunes of even a Coca Cola (NYSE: KO) 20, 30, or 40 years into the future. But at any rate, our time horizon is decidedly less expansive. We prefer stocks that show a decent chance not only of beating the market but also beating cash in the bank over the course of, say, the next year or two.

That said, we wish to associate ourselves entirely with the point of view expressed throughout Fooldom, which is that you ought not buy a stock simply because it looks cheap on a valuation basis. As our friend Randy Befumo put it bluntly not too long ago, cheap crap is still crap.

So first select the companies in which you want to invest, and then concern yourself about valuation.

That's what we've been doing, and that's what we'll continue to do. We don't intend to sit on our cash indefinitely, however. We've evaluated each of the Borefolio's current holdings, and by our reckoning not one of them is noticeably overvalued. So failing to locate even one new investment, our worst-case scenario (which we very much doubt we'll see) is simply to funnel some cash into our present holdings.

In coming Borefolio recaps, we'll say more about the company's that are making it onto our wish list, how their stocks shape up value-wise, and the prices at which we'd be willing to buy. In all of this, we gratefully request your active participation.

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


TODAY'S NUMBERS
Stock  Change    Bid 
 ANDW  -  9/16  27.94 
 CGO   -  1/4   28.88 
 BGP   -  13/16 31.88 
 CSL   +  7/16  47.38 
 CSCO  -  3/4   64.81 
 FCH   +  1/16  35.75 
 
                   Day   Month    Year  History 
         BORING   -0.78%   2.38%  -1.14%  24.40% 
         S&P:     -0.73%   5.13%   6.20%  65.79% 
         NASDAQ:  -0.74%   7.37%  10.72%  67.03% 
  
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     31.88   183.18% 
   6/26/96  150 Cisco Syst    35.93     64.81    80.37% 
   8/13/96  200 Carlisle C    26.32     47.38    79.96% 
    3/5/97  150 Atlas Air     23.06     28.88    25.23% 
   1/21/98  200 Andrew Cor    26.09     27.94     7.08% 
   11/6/97  200 FelCor Sui    37.59     35.75    -4.89% 
  
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  12750.00  $8247.51 
   6/26/96  150 Cisco Syst  5389.99   9721.88  $4331.89 
   8/13/96  200 Carlisle C  5264.99   9475.00  $4210.01 
    3/5/97  150 Atlas Air   3458.74   4331.25   $872.51 
   1/21/98  200 Andrew Cor  5218.00   5587.50   $369.50 
   11/6/97  200 FelCor Sui  7518.00   7150.00  -$368.00 
  
                              CASH  $13182.97 
                             TOTAL  $62198.60