Boring Portfolio

Atlas Carrying Bore
Thursday, April 9, 1998
by Mark Weaver (MWEAV@aol.com)


SPRINGFIELD, IL (April 9, 1998) -- The market rallied back in the final day of trading for the week with the Dow knocking on the 9000 door again. Inflation remains tame, as the "core" PPI (Producer Price Index) was unchanged this month. Interest rates on the long bond dropped a fraction to 5.89%. In this utopian environment stocks remain strong. On the day, the S&P rose 0.82% and the Nasdaq rose a surprisingly tame 0.73% given the strong earnings report from YAHOO! (Nasdaq YHOO) earlier today. The Borefolio finished the week on an upbeat note, up 1.28%.

Four of our stocks climbed with three holdings, Borders Group (NYSE: BGP), Atlas Air (NYSE: CGO), and Carlisle Companies (NYSE: CSL), rising more than a point.

I'd like to believe that Borders was buoyed by the upbeat report given by Greg Markus in last night's recap. If you didn't read it, make sure you do. Borders gained $1 3/16.

Atlas Air is still soaring after a BT Alex. Brown upgrade yesterday. I also reviewed a report from Moody's released yesterday that accompanied a rating announcement related to a new Atlas debt offering. These securities were rated B3 and Moody's noted that these ratings reflected "the capabilities of Atlas Air's management, the diversification of the company's customer base, and the company's continuing position as a low-cost provider of air cargo services."

The report does caution that in an economic downturn Atlas may be vulnerable given its relatively high amount of leverage. However, Moody's is complementary about management's moves to diversify its customer and geographic base. Moody's also felt that management had handled the economic crisis in Asia skillfully but cautioned that the jury is still out on the final impact of the economic and political turmoil in the Pacific Rim.

Atlas was up $1 7/16.

There was no news to account for the strong move in Carlisle. For what is typically regarded as a relatively sleepy stock, point sized moves aren't rare. Carlisle rose $1 7/16.

On the downside, Cisco Systems (Nasdaq: CSC) dropped $1 1/4. There was no significant news today.

Some of my leisure time over the past few weeks has been spent reading Michael Murphy's new book, Every Investor's Guide to High-Tech Stocks and Mutual Funds. In that book, Mr. Murphy presents a rationale for looking at technology stocks using a "Growth Flow" approach. A company's "Growth Flow" is the combination of after-tax earnings and research and development spending. The idea is that an investor should value a technology stock with an eye both to current earnings and future earnings potential. R&D is the basis for future earnings. The idea is that even a booming tech stock won't stay booming for long if it doesn't have an exceptional R&D program.

As an exercise, I decided to look at Borefolio holding Cisco Systems with "Growth Flow" in mind. In order to do this I had to dig into the recent 10-Q and last year's 10-K to find out how much "the Kid" is spending on R&D. As it turns out, the company is spending quite a lot, $842 million to be exact. Trailing 12-month earnings are $1,323 million. So, our "Growth Flow" for Cisco is $2,166 million.

In order to use "Growth Flow" as a valuation tool we have to compare this number to earnings. Mr. Murphy has found that Price/Growth Flow ratios between 10 and 14 represent fair value, while bargains are found with ratios under 8. Cisco has a $69.8 billion market cap. So (drum roll please) the Price/Growth Flow for Cisco is... 32. Hmmm, not exactly a screaming bargain eh?

On the plus side, Cisco is clearly what Mr. Murphy would call a great "Growth Flow" company. Great growth flow companies are growing sales at least 15% per year (Cisco has averaged 69% over the past 3 years), have pre-tax profit margins over 15% (Cisco has after-tax margins above that level), have a return on equity of 15% or more (Cisco's ROE is 24%), and spend at least 7% of sales on R&D (Cisco spends 11%).

Does the high P/GF mean that we should sell Cisco? Not at all. It does tell me that this might not be the best time to add to a position. Using the P/GF relationship can be a useful way to value companies that have sold off dramatically. If there is strong R&D spending, there is a decent chance for the stock to make a comeback.

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


TODAY'S NUMBERS
Stock  Change    Bid 
 ANDW  +  3/16  19.38 
 CGO   +1 7/8   35.00 
 BGP   +1 3/16  33.00 
 CSL   +1 7/16  48.94 
 CSCO  -1 1/4   66.94 
 FCH   -  1/2   35.75 
 
                   Day   Month    Year  History 
         BORING   +1.28%  -1.04%   0.02%  25.86% 
         S&P:     +0.82%   0.81%  14.45%  78.67% 
         NASDAQ:  +0.73%  -0.84%  15.91%  74.86% 
  
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     33.00   193.17% 
   6/26/96  150 Cisco Syst    35.93     66.94    86.28% 
   8/13/96  200 Carlisle C    26.32     48.94    85.90% 
    3/5/97  150 Atlas Air     23.06     35.00    51.79% 
   11/6/97  200 FelCor Sui    37.59     35.75    -4.89% 
   1/21/98  200 Andrew Cor    26.09     19.38   -25.74% 
  
  
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  13200.00  $8697.51 
   6/26/96  150 Cisco Syst  5389.99  10040.63  $4650.64 
   8/13/96  200 Carlisle C  5264.99   9787.50  $4522.51 
    3/5/97  150 Atlas Air   3458.74   5250.00  $1791.26 
   11/6/97  200 FelCor Sui  7518.00   7150.00  -$368.00 
   1/21/98  200 Andrew Cor  5218.00   3875.00 -$1343.00 
  
                              CASH  $13625.51 
                             TOTAL  $62928.64