Boring Portfolio

Cisco Buys
...and FelCor sellsBook Wars!!

by Greg Markus
(TMF Boring)

ANN ARBOR, Mich. (Aug. 21, 1998) -- Weakness in foreign markets sent U.S. stocks sharply lower Friday, although late-session buying trimmed the losses considerably. The Nasdaq, which was down more than 3.5% at one point, ended the day off 1.90%, while the S&P 500 finished lower by 0.95%.

As has been the case for some time now, small-cap stocks were particularly hard hit, and that's reflected in the 2.11% loss inflicted upon the Boring Portfolio.

Only two of the Borefolio's eight holdings rose Friday. One was big-cap Cisco Systems (Nasdaq: CSCO), a.k.a. El Invincible, which edged up $1/8 to $102 3/4.

Having gone more than three weeks without acquiring a business, Cisco announced this morning that it would buy closely held American Internet Corp. (catchy name) for $56 million in stock.

Based in Medford, Mass., privately held American Internet provides software that facilitates the deployment and support of Internet access via set-top boxes and cable modems. Company founder and CEO Bob Brennan will continue to lead his team of 50 employees following the acquisition.

The other Boring gainer on Friday was FelCor (NYSE: FCH), which rose $9/16 to $24 3/4.

FelCor announced that it has sold two of the Holiday Inns acquired as part of its recent acquisition of the former Bristol Hotel properties. FelCor sold the 199-room Holiday Inn Express - Northeast, in Atlanta, Ga., to American Management Services and the 200-room Holiday Inn-Orlando North-Winter Park, in Orlando, Fla. to Additya Inc. for an aggregate price of $7.7 million.

In a press release, FelCor said the hotels were sold at a "cap rate" of 6.1% and that the transaction is accretive to earnings.

(According to my cheat-sheet, the cap rate is basically the ratio of a property's operating earnings to its sale value -- kind of like the inverse of a p/e ratio. So when you're selling a property, the lower the cap rate, the higher the price you're receiving for the property. A 6.1% cap rate strikes me as a very attractive deal for FelCor shareholders.)

In addition, FelCor said it has pending sales contracts on five additional limited-service hotels, acquired through the FelCor/Bristol merger, which are expected to yield proceeds of an aggregate $20 million.

As I understand it, these transactions are entirely consistent with what FelCor's management said they would do following the merger -- namely, divest the properties that don't fit with the REIT's focus on the upscale and full-service end of the market, with the cash being used to upgrade and rebrand the "keepers."

On the downside -- which was a fairly crowded place to be on Friday -- Borders Group (BGP) had the dubious distinction of falling $2 5/16 to $24 15/16 in above-average trading.

As everyone except perhaps any souls aboard the Mir spacecraft know by now, the formerly tranquil world of book-selling has been rocked by the explosion of interest in retailing over the Internet.

As Mark Weaver noted in Thursday's Boring recap, Barnes & Noble (NYSE: BKS) has announced that it will spin off a portion of the ownership of its e-commerce site,, to the public.

The motivation for the sale appears to be partly to raise cash with which to fund further development of B&N's Website and partly to differentiate between investors who are attracted to red-hot Internet stocks and those, shall we say, "legacy" investors who prefer to own companies that actually return a profit -- or at least offer some reasonable chance of doing so before the millennium odometer rolls over.

Whatever the motivation, it's abundantly clear that B&N intends to throw even more cash -- both its own and those of new investors -- at its Website. Add to this the news that media-giant Bertelsmann is moving into e-tailing in a big way and it's a safe bet that at least some former Borders investors are bailing because they fear that their horse has been left at the cyber-gate.

If so, my immediate reaction is that (a) they may be right, and (b) it may not matter.

As to (a), the actions -- or, rather, inactions -- of Borders over the past year make it clear even to me that the Ann Arbor-based book-seller intends to approach e-tailing in a way that does not result in the kinds of cash hemorrhages that (Nasdaq: AMZN) and B&N have experienced. Borders appears to want to protect its flank on the Internet, but probably not a whole lot more.

Which leads us to (b).

In light of what has all the makings of a race to the bottom (and beyond?) for operating margins, perhaps it's not such a bad idea after all to limit one's exposure to Internet-based sales and to offer a more diversified business strategy that includes e-commerce along with a bricks-and-mortar international expansion?

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

08/21/98 Close

Stock  Change    Bid 
 ANDW  -  3/16  15.69 
 CGO   -  11/16 32.38 
 BGP   -2 5/16  24.94 
 CSL   -1       42.69 
 CSCO  +  1/8   102.75 
 FCH   +  9/16  24.75 
 PNR   -1 1/8   37.06 
 TBY   -  1/16  7.00 
                   Day   Month    Year  History 
         BORING   -2.11%  -6.30%  -6.12%  18.12% 
         S&P:     -0.95%  -3.52%  11.42%  73.94% 
         NASDAQ:  -1.95%  -4.05%  14.41%  72.59% 
     Rec'd   #  Security     In At       Now    Change 
   6/26/96  150 Cisco Syst    35.93    102.75   185.95% 
   2/28/96  400 Borders Gr    11.26     24.94   121.54% 
   8/13/96  200 Carlisle C    26.32     42.69    62.16% 
    3/5/97  150 Atlas Air     23.06     32.38    40.41% 
   4/14/98  100 Pentair       43.74     37.06   -15.27% 
   5/20/98  400 TCBY Enter    10.05      7.00   -30.31% 
   11/6/97  200 FelCor Sui    37.59     24.75   -34.16% 
   1/21/98  200 Andrew Cor    26.09     15.69   -39.87% 
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  150 Cisco Syst  5389.99  15412.50 $10022.51 
   2/28/96  400 Borders Gr  4502.49   9975.00  $5472.51 
   8/13/96  200 Carlisle C  5264.99   8537.50  $3272.51 
    3/5/97  150 Atlas Air   3458.74   4856.25  $1397.51 
   4/14/98  100 Pentair     4374.25   3706.25  -$668.00 
   5/20/98  400 TCBY Enter  4018.00   2800.00 -$1218.00 
   1/21/98  200 Andrew Cor  5218.00   3137.50 -$2080.50 
   11/6/97  200 FelCor Sui  7518.00   4950.00 -$2568.00 
                              CASH   $5686.93 
                             TOTAL  $59061.93