Boring Portfolio

A Talk with FelCor
...and the Boring Retrospective concludes

by Greg Markus (TMF Boring)

ANN ARBOR, Mich. (Aug. 28, 1998) -- An attempt at a rally in U.S. stocks was thwarted Friday as concerns about slowing domestic economic growth converged with continuing worries on the international front. The Nasdaq took the brunt of selling, falling 2.76%. The S&P 500 lost 1.48%, while the Russell 2000 tumbled almost 2% to set yet another 52-week low in what has already become a full-fledged bear-market for small-cap stocks.

Among Boring stocks, Atlas Air (NYSE: CGO) announced today that it intends to expand its stock repurchase program by 100,000 shares, thereby doubling the plan announced back in March. That news buoyed the stock briefly, but CGO hit an airpocket late in the session, descending $2 3/4 to $26 1/8 in fairly heavy trading.

You don't have to be a rocket scientist to deduce that at least some former Atlas shareholders were uneasy about the company's heavy exposure to Asian and Latin American markets. In the past, Atlas executives have argued that financial weakness in Asia only exacerbates the need for producers there to export their goods to the U.S. and Europe; and so far at least, Atlas's block-hour statistics have borne that out. Whether there comes a point where that logic begins to break down -- and whether or not we're likely to reach that point -- are questions to which I have no answer at this time. And I'm not at all sure that anyone else does, either.

Shares of our hotel REIT, FelCor Lodging Trust (NYSE: FCH) continue to fall out of bed. FCH dropped $1 1/16 to $21 15/16.

I checked in with FelCor CFO Randy Churchey this afternoon to ask whether FelCor contemplated taking the route announced by Atlas and implement a stock repurchase plan. After all, as the FelCor share price declines and dividend approaches 10%, we're finding ourselves in territory where the stock may present the best available use for FelCor's internally generated cash at this time.

Churchey said that the company has considered this option but that they continue to believe they can produce a 15% cash-on-cash return for shareholders by investing the cash in renovating, upgrading, and rebranding properties.

That's certainly been the FelCor modus operandi to date, and the gains in average daily room rates and RevPAR (revenues per available room) that FelCor has achieved through that strategy appear to me to be consistent with Churchey's argument. FelCor's most recent 10-Q was filed with the SEC just two weeks ago, by the way, so Foolish investors who are so inclined may want to check out the numbers themselves.

While I had Churchey on the phone, I asked him about FelCor's recent announcement that it had sold two small properties it acquired from Bristol at a "cap rate" of 6% (which is, roughly, equal to selling at a P/E of 17). In particular, I asked if that cap rate might have been a typo, since it implies a deal that favored FelCor noticeably better than the rate at which most hotels have been changing hands lately.

Churchey replied that 6% was indeed the cap rate. He said he believes that the folks who purchased the properties intend to run them as independent hotels, thereby saving themselves the franchise fees, and thus expect to make a profit that will justify the price they paid to FelCor.

And with that out of the way -- and looking forward very much to a weekend without a thought of stocks -- we turn now to the concluding installment of the Boring Retrospective. In Part I and Part II I reviewed how I first stumbled into The Motley Fool, received the nom-de-screen "TMF Boring," and eventually commenced the online, real-time learning experience known as the Boring Portfolio. Part III brought us up to the present -- a time in which small stocks have gotten clobbered despite the good value they offer.

And now to Part IV...

Over the past 32 months, I have researched, written up, and purchased some 22 stocks for the Borefolio, researched and passed on perhaps ten times that many, sold 14 former holdings, written almost 600 nightly recaps, and reported on 80 quarterly conference calls. Each of you will know far better than I what value, if any, this has been to you. All I can do is offer a few thoughts on what I think I've gained from the experience.

Undeniably at the top of my list is the fellowship I've enjoyed with hundreds of wonderful folks at Fool HQ, on America Online (NYSE: AOL), and at the Fool Website. Not only have I traded posts and emails with many of you, I've also met some of you "in real life," as they say, in my travels around the country. Thank you, one and all.

I've also learned a good deal about how to research stocks -- about financial accounting, valuation, where to get information online, and how to ring up companies and get answers. I've also learned how important it is to pay attention not only to the messages posted in Fooldom that you agree with but also (and maybe even especially) to ones that clash with your own point of view. There's nothing that a raging bull needs more than the well-reasoned arguments of a skeptical bear, and vice versa.

In that regard, two of the biggest craters in Borefolio history resulted not from small-cap investments but from ones in relatively larger companies: Oxford Health Plans (Nasdaq: OXHP) and Green Tree Financial, which is now a part of Conseco (NYSE: CNC). In both instances, the stock crashes occurred as a result of either willful concealment of material information on the part of company executives, deep denial on their part, or both. Hundreds of investors, including some of the largest mutual funds on earth, lost hundreds of millions of dollars as a result. And in both instances there was no shortage of posts on TMF's message boards from intelligent bears who pointed straight at the bombshells before they exploded.

I've also learned the importance of focusing not only on the trees of the individual companies but also on the forests in which they grow. Even companies that provide outstanding products or services and that are led by the savviest managers can suffer mightily if their fortunes are largely at the mercy of environmental factors over which they have little control.

For example, semiconductor infrastructure companies such as former Borefolio holdings Kulicke & Soffa (Nasdaq: KLIC) and Lam Research (Nasdaq: LRCX) can't increase their profits when the chip industry falls into one of its periodic slumps. Or, a company in the heavily regulated healthcare industry, such as the impressive cash-flow generator Prime Medical Services (Nasdaq: PMSI), will find itself in a world of hurt should a sudden change in the regulatory environment upset its strategic apple cart. That's not to say that you should necessarily steer clear of all such companies as investments; but it is to say that, if you do invest in them, take particular care to understand all the risks.

There are risks in investing in individual stocks, of course, but there are also rewards. Particularly in the land of smaller stocks, opportunities exist to unearth little-known gems, such as the Carlisle Companies (NYSE: CSL) or Solectron (NYSE: SLR) -- the latter of which was one of my best Borefolio buys and perhaps my dumbest sell.

It's also possible to profit significantly by capitalizing on instances where the market has temporarily zigged when it should have zagged in pricing an underfollowed stock. Electronics power supply maker and Baldrige award winner Zytec -- which has since become merged into the unfortunately renamed Artesyn (Nasdaq: ATSN) -- and piping projects leader Shaw Group (NYSE: SGR) are two former Boring investments that come to mind in that regard.

There's another thing I've learned, and it has to do with a difference between investing in private and doing it out here in front of everybody. As the Borefolio progressed, I occasionally found myself conflicted between, on the one hand, rendering a hard-headed "sell" decision when I'd concluded that a stock had gone well past my conception of fair value or that its "story" had deteriorated and, on the other hand, trying to provide myself with sufficient time to establish a mutually respectful relationship with companies I'd invested in so that I could offer useful and (to the best of my ability) accurate information to interested readers.

I don't want to overstate the magnitude of this problem: it occurred only in a few instances. But those few instances were uncomfortable for me, and even now I'm not sure whether there's any neat resolution to the sometimes conflicting roles of public portfolio manager and information provider.

Partly for that reason, and partly because I need a break from the deadline-driven schedule of researching and writing four reports a week (not to mention covering a barrage of conference calls every thirteen weeks), I recently notified the folks at Fool HQ that I'd like to rotate out of my Borefolio duties. They've agreed, and a team based at HQ -- most likely Dale Wettlaufer (TMF Ralegh) and Alex Schay (TMF Nexus6) -- will take over sometime next month. The new team will be offering their thoughts soon on what changes they'll be making in the Borefolio, both in terms of general approach and specific new buys and sells.

For any conspiracy theorists lurking out there, I want to emphasize that this change is entirely at my request and is unrelated to the Borefolio's underperformance relative to "the market." There are, after all, vanishingly few small and midcap funds that have fared much better lately. I might also note that more than a year ago I discussed with my friends in the "Boring Stocks" folder (on the AOL side of Fooldom) my desire to ease out of managing the Borefolio. This was not a snap decision.

At any rate, I ain't going anywhere. What I've enjoyed the most about this Borefolio gig has been doing the background research, calling up companies, asking questions, getting answers, and doing my bit to open up to the investing public the formerly closed world of quarterly conference calls. Those are precisely the things I intend to continue to do in Fooldom, and, after I'm relieved of the portfolio management chores and the daily deadlines, I hope be able to do them with renewed energy and enthusiasm.

I can hardly wait to see what happens next.

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

08/28/98 Close

Stock  Change    Bid 
 ANDW    ---    14.50 
 CGO   -2 3/4   26.13 
 BGP   -  11/16 20.63 
 CSL   -1       40.13 
 CSCO  -4 7/16  94.69 
 FCH   -1 1/16  21.94 
 PNR   -1 3/4   32.00 
 TBY   -  1/4   6.31 
                   Day   Month    Year  History 
         BORING   -3.70% -15.77% -15.61%   6.19% 
         S&P:     -1.53%  -8.35%   5.84%  65.24% 
         NASDAQ:  -2.77% -12.43%   4.41%  57.52% 
     Rec'd   #  Security     In At       Now    Change 
   6/26/96  150 Cisco Syst    35.93     94.69   163.51% 
   2/28/96  400 Borders Gr    11.26     20.63    83.23% 
   8/13/96  200 Carlisle C    26.32     40.13    52.42% 
    3/5/97  150 Atlas Air     23.06     26.13    13.30% 
   4/14/98  100 Pentair       43.74     32.00   -26.84% 
   5/20/98  400 TCBY Enter    10.05      6.31   -37.16% 
   11/6/97  200 FelCor Sui    37.59     21.94   -41.64% 
   1/21/98  200 Andrew Cor    26.09     14.50   -44.42% 
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  150 Cisco Syst  5389.99  14203.13  $8813.14 
   2/28/96  400 Borders Gr  4502.49   8250.00  $3747.51 
   8/13/96  200 Carlisle C  5264.99   8025.00  $2760.01 
    3/5/97  150 Atlas Air   3458.74   3918.75   $460.01 
   4/14/98  100 Pentair     4374.25   3200.00 -$1174.25 
   5/20/98  400 TCBY Enter  4018.00   2525.00 -$1493.00 
   1/21/98  200 Andrew Cor  5218.00   2900.00 -$2318.00 
   11/6/97  200 FelCor Sui  7518.00   4387.50 -$3130.50 
                              CASH   $5686.93 
                             TOTAL  $53096.31