Boring Portfolio Boring Sells TXI
October 24, 1996

1341 W. Mockingbird Lane
Dallas, TX 75247
Phone: (214) 647-6700

Closing Price, October 24, 1996: $57 3/8
Trade: Sell 100 shares

Texas Industries is a leading provider of cement, aggregates and concrete in its regional market. Chaparral Steel, which is 85%-owned by TXI, produces for the North American market a variety of high quality carbon steel products from recycled steel in its technologically-advanced mini-mill.

TXI is the sole survivor of the original Boring Portfolio that was launched on January 29, 1996. Before that, I, and others in Fooldom, followed the company informally in the "Boring Stocks" folder, watching it more than double in price since early 1995.

Strong earnings growth and consequent share-price appreciation were what first drew my attention to TXI. At the outset, I didn't know the company from the man in the moon; and it sounded like too boring a business even for me to follow.

As I got to learn more about the company, however, I found more to like. TXI's earnings weren't growing like crazy simply because the Texas economy had recovered (although that was certainly part of the story). They were also growing because TXI's (and Chaparral's) management knew what they were doing.

TXI focused on its "sell everything we touch" strategy, which turned former byproducts of its cement and aggregates business into useful, salable goods. Plain old sand that wasn't used in concrete production and had little or no market value was transformed into a valued product that was sold to golf courses for their sand traps. Clay and shale were baked and ground up to become the material of choice for dressing baseball diamonds. (Four of the eight big-league teams in the 1996 play-offs were TXI customers.)

Most recently, the company even figured out a way to use slag waste from Chaparral's steel-making operation as an input to cement-making, thereby increasing productivity by 5-10% almost for free. Through it all, ordinary workers were given broad responsibility and authority to handle their parts of the business with an eye toward maximizing value.

Meantime over at Chaparral, workers were being cross-trained in virtually every aspect of the enterprise, so that everyone knew the entire operation from the ground up. The company (headed by a PhD, no less) became a model for Harvard MBA students to study. Chaparral became a leader in making light-weight construction beams for low-rise commercial construction and the manufactured home industry.

I don't want to sound like the public relations arm of the company. Not everything was all sweetness and light. Both the steel and cement operations have taken hits from environmental groups in the Dallas area, for example. The cement kilns burn waste products (such as used dry-cleaning fluids and waste oil) to offset fuel costs. The steel operation, as does any minimill, generates its own pollutants to a degree. The company counters that it meets all environmental regulations and performs an environmentally useful service by safely and frugally utilizing waste fuels and scrap steel as inputs to produce high quality products for the construction industry. I've studied the matter fairly carefully, and to my eye both sides to the dispute have valid points.

My decision to sell the Borefolio's 100 shares of TXI is not an easy one for me. The company has always been absolutely straightforward in providing every shred of information I've requested. They were among the first of over 300 companies to date that have opened their quarterly teleconferences to individual investors by way of The Motley Fool. Perhaps most importantly, I continue to believe that the stock is undervalued at current prices and has decent growth potential for the long haul.

The market doesn't do what I tell it to do, however. Although the stock has made some attempts to recover from a protracted slide since August, it has undeniably underperformed the market. Looking into 1997, EPS growth in the single digits may not attract many new investors, especially if the macroeconomy finally begins to ease off following the elections.

As I pointed out when I began this portfolio, I am not inclined to hold stocks for months and months if the story behind the purchase changes in some significant way or if the market conveys to me the clear message that although I may like the stock, it does not. Some recent softening in steel prices, the economy's stage in the business cycle (as I interpret it), and generally unsettled near-term market conditions all impel me to pull the trigger -- which brings me to my last point.

My decision to sell TXI is not made in isolation. It is part of a broader initiative to raise cash at this time. I've complained for a few weeks now about an overvalued market, and I've decided to act on my assessment of the situation. If I'm right, I'll save the Borefolio some short-term losses. If I'm wrong, we'll all know soon enough, and it will be a worthwhile lesson in the general futility of trying to time the market.

At any rate these kinds of decisions can always be revised in light of new evidence: with virtually every sale of a stock, I hold open the possibility of rebuying at a later date, even at a higher price if it makes sense to do so. I'll continue to follow TXI, and I'd be delighted to welcome it back into the Borefolio in the future.

--Greg Markus (MF Boring)