Boring Portfolio

<THE BORING PORTFOLIO>
What's on the Boring Radar
and the Boring Way

By Dale Wettlaufer (tmfralegh@aol.com)

Alexandria, VA (Jan. 6, 1999) -- Yesterday somebody asked me what I find attractive right now. You know, that's a good question. One of the reasons why we set up the "Boring Radar" is to help us keep track of things we've looked at but haven't bought and things that we want to look at in the future. Only a few of these are short candidates and some of them have performed so well that we no longer have much interest.

For instance, E*Trade Group (Nasdaq: EGRP) has lost its research priority for us, having more than doubled since we put it up on the radar. We are price conscious, and each move up for a company we don't own diminishes the performance that we can expect out of an investment. We're definitely not relative strength sort of investors. We couldn't care less if something has a 99 relative strength or a 1 relative strength, as long as we can get it at a significant enough discount to its intrinsic value. So, while E*Trade's move up does not in and of itself kill its attractiveness, it does mean our research priorities move elsewhere.

Speaking of low relative strength stocks, Equifax (NYSE: EFX) has recently popped onto the radar. Here's what the company does: "Equifax is the leader in providing consumer credit information in the U.S., and consumer and commercial credit information in Chile, Argentina, U.K., Spain, Portugal, and Canada. The company is the leader in full-service credit card processing for credit unions and community banks in the United States. It is also a leader in providing check guarantee and verification in the U.S., U.K., Canada, Ireland, France, Australia, and New Zealand." The company is most familiar to consumers who have applied for a credit card, auto loan, or mortgage. The other leaders in this area are Experian Information Solutions, which was sold to The Great Universal Stores plc (London: GUS) by TRW Inc. (NYSE: TRW), and Trans Union Corporation, a unit of private holding company The Marmon Group.

Equifax is an "infomediary," to lift a term I saw in the company's third quarter investor report. This is an intellectual property business like software, meaning it's a high return on capital business if run properly, which Equifax is. Given a set of assets that is ridiculously difficult to reproduce and a market that is limited to a few major producers, the breakeven point in this business is low. Once you've reached your breakeven point, marginal revenues are highly profitable. This gives the company a good stream of cash to reinvest to further some of these lock-down characteristics and to extend the franchise in new markets. Here's a link to Equifax's excellent web page for investors.

We'll be looking more closely at this company in the near future. Other items on the radar worthy of comment are two pink-sheet banks that we like. One is Burke & Herbert Bank & Trust Co. (OTC BB: BHRB) here in Alexandria, Virginia. At $565, the company is still trading just under a 10% earnings yield, and that's after the stock has appreciated 35% per year over the last two years. At the end of 1996, the company was trading at an earnings yield of 16.3% and a dividend yield of 4.8%. Somebody has recognized this as Virginia's oldest bank, but it still trades at a reasonable price, given its 1.76% return on assets and 17.6% return on equity.

What we have here is a very low-cost bank with true franchise territories in the Northern Virginia area, especially here in Alexandria. First, the company puts very little money into its facilities. Its branches are not plush, its phones actually have bells that ring, its NCR terminals are definitely not state-of-the-art, and the furniture at the main branch has been used for at least a couple of generations. It is branching out, however, as the company has decided to step on the growth pedal with natural demographic growth here outside Washington, D.C. in Fairfax and Arlington Counties in northern Virginia. Last year, bank premises and equipment increased 17.8%.

But this isn't a NationsBank-like growth strategy. Burke & Herbert is very well-known in the Alexandria area as an old-fashioned bank. If you happen to overdraw your account, they call you up and let you know before they charge you the hefty overdraft fee. Their service is very personal, and while I think this isn't largely expected in this world and isn't a big demerit for the large banks, I have observed the customer satisfaction Burke & Herbert's service has created. This isn't something that we would think about right now, but we have this kind of thing on the radar in case it ever does get back to the very low levels of its past because of trading liquidity and other factors not having much to do with the performance of the company.

Along this same line, we have First Citizens Bancorporation of South Carolina (OTC BB: FCBN) on the radar. Just as a disclaimer, I own this company. Of all the states in the Union, South Carolina is projected to enjoy one of the best combinations of growth in population and per-capita income over the next 11 years, according to 1995 Census figures. South Carolina is ranked number four of the 50 states and the District of Columbia, scoring the states by multiplying population growth by per-capita income growth. Click here for the Excel 97 spreadsheet and click here for the Excel 95 spreadsheet.

The idea here is that this is a consumer bank and that consumer banks rely upon personal savings, borrowings, and transaction needs to grow the franchise. For retail institutions, the region in which the company operates dictates the growth potential of the company while the way the company is run, of course, dictates whether the company is able to reach or surpass its potential. I think First Citizens is well run and conservative in its accounting. Backing goodwill amortization out of earnings, the company was running an ROA of 1.33% and an ROE of 19.1% earlier in the year. Reserves are very good, the company's loan to deposit ratio is lower than its peers, and its assets are very liquid on a peer comparison basis. Also, its funding is excellent, being in the 82nd percentile for core funding as a percent of total assets of bank holding companies of its size; its jumbo CDs as a percentage of assets are in the 16th percentile. The attraction here is that it's a pretty boring, well-run bank in a state with attractive demographics.

Other things on the radar are companies that we like very much but that have moved away from prices that we would consider very good bargains. These include Costco Companies (Nasdaq: COST), Estee Lauder (NYSE: EL), Jabil Circuit (NYSE: JBL), Capital One Financial (NYSE: COF), Intel (Nasdaq: INTC), Morgan Stanley Dean Witter (Nasdaq: MWD), Sanmina (Nasdaq: SANM), Zions Bancorporation (Nasdaq: ZION) and a host of others. One thing many of these share is that they were all much lower this year, adding a very good opportunity to acquire these companies at very reasonable prices. Capital One Financial, for instance, crashed in October during the credit crunch and on non-sensical worries that the VISA-MasterCard antitrust issue would hurt Capital One. We'll have to reconcile our deliberate approach to demonstrate how we go through looking at a problem with the occasional necessity to move quickly to take advantage of these sorts of things.

And then we have some things on the radar that we do consider to offer fine prices. These include PC maker Gateway (NYSE: GTW), BankAmerica (NYSE: BAC), First Union (NYSE: FTU), and SLM Holding Corp. (NYSE: SLM). Other companies we don't know too much about but have recently added to the radar are medical device maker Stryker Corp. (NYSE: SYK) and industrial products distributor W.W. Grainger (NYSE: GWW), credit insurance company American Bankers Insurance Group (NYSE: ABI), US Bancorp (NYSE: USB), and SAP AG (NYSE: SAP). For the last one, I will need to get up to speed on the ERP software industry. Luckily, Alex knows something about these and I think there are some other Fools whose brains we can pick there. So, we're not devoid of ideas right now, but our universe has narrowed out a bit. We're definitely seeing fewer companies come onto our research list than we see leaving every day.

The way we work, however, is that we look at a ton of companies and only pull the trigger a few times per year. So I'm sure this will seem like a lot of beating around the bush to a lot of people, but that's the Boring way as we see it.

Call Your Boss a Fool.

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01/06/99 Close
Stock  Change    Bid
ANDW  +  13/16 17.88
BGP   +1 3/16  25.06
CSL   +1       52.94
CSCO  +3 3/16  100.13
FCH   -  1/4   22.56
PNR   -1 1/4   40.38
TBY     ---    6.69
                   Day   Month    Year  History
        BORING   +2.03%   3.09%   3.09%  38.43%
        S&P:     +2.22%   3.51%   3.51% 111.40%
        NASDAQ:  +3.09%   5.85%   5.85% 122.95%

    Rec'd   #  Security     In At       Now    Change
  6/26/96  225 Cisco Syst    23.96    100.13   317.96%
  2/28/96  400 Borders Gr    11.26     25.06   122.65%
  8/13/96  200 Carlisle C    26.32     52.94   101.09%
  4/14/98  100 Pentair       43.74     40.38    -7.70%
  1/21/98  200 Andrew Cor    26.09     17.88   -31.49%
  5/20/98  400 TCBY Enter    10.05      6.69   -33.42%
  11/6/97  200 FelCor Sui    37.59     22.56   -39.98%

    Rec'd   #  Security     In At     Value    Change
  6/26/96  225 Cisco Syst  5389.99  22528.13 $17138.14
  2/28/96  400 Borders Gr  4502.49  10025.00  $5522.51
  8/13/96  200 Carlisle C  5264.99  10587.50  $5322.51
  4/14/98  100 Pentair     4374.25   4037.50  -$336.75
  5/20/98  400 TCBY Enter  4018.00   2675.00 -$1343.00
  1/21/98  200 Andrew Cor  5218.00   3575.00 -$1643.00
  11/6/97  200 FelCor Sui  7518.00   4512.50 -$3005.50

                             CASH  $11273.22
                            TOTAL  $69213.84


</THE BORING PORTFOLIO>