Boring Portfolio

A Focused Portfolio
Carlisle Moves

by Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (April. 19, 1999) -- The Bore Portfolio ran into a buzzsaw today, as Cisco Systems (Nasdaq: CSCO) dropped $5 11/16 to $100 today in the midst of a very ugly looking day on Wall Street. We're going to take knocks like this here and there as a result of our focus investing style, which by the way, I think is quite well articulated by Warren Buffett Way author Robert Hagstrom, in his new book, The Warren Buffett Portfolio. In fact, we kind of got off light today overall in comparison with the market and other focused portfolios here at the Fool.

One of the best things that Tom and David do with their portfolios, which should be practiced by far more mutual funds and which is a reason I think (and I say this without any guileful intent) the Fool could get into the business of mutual funds, is that they think about their holdings as a business owner thinks about private companies. They don't sell or buy based on macro calls, rotate sectors, concentrate half their energy on charts or "technicals," and sell because something has grown into too large a position in the portfolio.

If you could wipe out some of the snap buying and selling and get fund managers to concentrate on their best ideas, you'd probably see an increase in 1.) The after-tax returns of their fund shareholders; and 2.) See better performance relative to the S&P 500 index. After all, fund manager Bill Miller makes the observation that the S&P 500 is not a passive index, but rather a buy-and-hold low turnover portfolio that is relatively concentrated. If more funds were to emulate some of those characteristics, then more funds might keep up with the index. One thing I've noticed before is that many brokerages' "Best Picks" list tend to outperform the S&P 500. I believe that is due to the fact that the analyst has to concentrate on his or her best idea and then no one gets to touch it for a year. No fiddling around with re-balancing, no selling because it's outperformed its peers, no selling because it has reached historically high levels.

Value investors in general are usually in a stock too early and out too early, constructing a long-term investing portfolio more like a portfolio of arbitrage positions, selling when things get historically expensive and buying when things get historically cheap. When Alex and I took over the Boring port, Cisco was the largest holding and was reasonably priced. At that time, it was just under 26% of the portfolio and it now represents just about 34.6% of the portfolio. I've found that many of the best-performing general equity mutual funds are also concentrated in a few names at the top of the portfolio and are low-turnover portfolios.

This is not a worry for us -- it's just a natural result of wanting to own a few very good companies at reasonable prices and not constantly fiddling around with things. With that in mind, of larger concern to us is the economics of the underlying companies than their portfolio weighting. Of course a big problem could come along and get the portfolio shot to bits. And of course we don't recommend this approach to many people. We realize the Borefolio is a niche product at the Fool and what we do is unusual. But we don't see that as an irrational way to run things in a private portfolio where we don't mind volatility. Our investment objectives don't have anything to do with a smooth ride.

I suppose today is a strange day to pick to talk about that, as we "outperformed" the S&P 500 even with Cisco being down 5%+ and Gateway (NYSE: GTW) being down 7.3%. Carlisle Companies (NYSE: CSL) picked up the slack for us, as the company reported on Thursday another good quarter of growth, with sales up 7.4% year-over-year, to $390 million. Operating earnings increased due to a slight improvement in margins, keeping overhead and sales expense growth below revenue growth, and keeping R&D growth flat. Per-share operating earnings, excluding a net gain on divestitures this year, increased 9.3% and EPS increased 15%, due both to lower net interest expense as a percentage of sales and a reduction in the company's tax rate. Excluding container operations, which will be divested, backlog was up 18% year-over-year resulting from good order growth across the board. Net cash from operations was up 60%, due to higher earnings and better capital management.

As the company guided last quarter, discretionary capital expenditures declined and total cap ex was down 50% year-over-year. Since I look at free cash flow, or owners' earnings, as net cash from operations less maintenance cap ex, a reduction in discretionary capital expenditures doesn't change free cash flow. The divestiture and the extra amount of cash that is on the balance sheet as a result, however, does mean the company is in a better capital position.

At present, they are looking at a number of smaller acquisition opportunities and a few larger one. One thing we don't worry about with this management team is its value discipline. They're not doing deals just to keep the pipeline full like some mutant love child of conglomerate ITT and a rollup like Service Corp. As I said last quarter, we don't need to constantly look over the shoulders of Carlisle's management. It's nice to see the stock price reflect that, though I believe the company needs some good larger investment opportunities to move things along at the pace we've seen in the past. Since that does reflect their discipline, I'm not too worked up about it.

Have a good Monday night. We hope to see you on the Boring board.

Make a Living Foolin' Around.

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04/19/99 Close
Stock Change   Bid
BRKb  +6       2406.00
CSL   +3 3/8   48.63
CSCO  -5 11/16 100.00
GTW   -4 11/16 59.50

                  Day     Month   Year  History
        BORING   -1.55%  -3.33%  -3.06%  30.16%
        S&P:     -2.24%   0.24%   5.22% 114.79%
        NASDAQ:  -5.57%  -4.72%   6.97% 125.33%

    Rec'd   #  Security     In At       Now    Change
  6/26/96  225 Cisco Syst    23.96    100.00   317.44%
  8/13/96  200 Carlisle C    26.32     48.63    84.71%
 12/31/98    8 Berkshire   2244.00   2406.00     7.22%
   2/9/99  100 Gateway 20    72.38     59.50   -17.79%

    Rec'd   #  Security     In At     Value    Change
  6/26/96  225 Cisco Syst  5389.99  22500.00 $17110.01
  8/13/96  200 Carlisle C  5264.99   9725.00  $4460.01
 12/31/98    8 Berkshire  17952.00  19248.00  $1296.00
   2/9/99  100 Gateway 20  7237.50   5950.00 -$1287.50

                             CASH   $7658.52
                            TOTAL  $65081.52