Boring Portfolio Report
Monday, July 8, 1996

by Greg Markus (MF Boring)

ANN ARBOR, MI (July 8) -- Stocks attempted to rally on Monday but fell in late-session selling. Share volume was relatively light, about what one might expect for a summertime post-holiday Monday. The S&P 500 index lost three-quarters of a percentage point in value, while the NASDAQ Composite index fell nearly 10 points (-0.82%). The DJIA receded 37 points, or 0.67%, to 5551.

As for the Boring Portfolio, it once again beat the market averages by dint of losing less in value than they did. Thanks, but no thanks. The fact that the Borefolio shed "only" 0.43% in net asset value (or $225, not counting daily interest accrued on the cash balance) is of scant comfort to me.

The bulk of the damage to the Borefolio on Monday was concentrated in Green Tree Financial. No one should be surprised that financial sector stocks continued to be among the hardest hit as traders priced in the likelihood of rising interest rates. I've got no problem with that; but my own view is that the continuing strength of manufactured homes sales, and the popularity among investors of GNT's high-quality securitized debt offerings, merit perhaps a bit more weight in the calculus than they've received recently.

Just today, for example, the Dallas Morning News featured a story about the rapid growth of the manufactured homes business, a field in which GNT is the undisputed king of mortgage finance. The newspaper story noted that "with expected production of 360,000 units in 1996, manufactured homes are a $12 billion industry that accounts for 33 percent of the single-family housing market, up from 25 percent in 1991."

Manufactured housing is the fastest-growing segment of the home-building industry because of the price and quality advantages of the product as compared with conventionally-built alternatives. Moreover, the low unemployment and modest wage increases among hourly workers that Friday's macrostats revealed are conditions that are likely to bolster sales of factory-built homes, as long as interest rates don't rise far beyond current levels.

Recall, also, that after Green Tree makes loans to folks to finance manufactured housing, horse trailers, home improvements, grand pianos, Harley-Davidsons, and so forth, it bundles the debt together and sells it to investors. In this way, increases in interest rates are largely passed right through. After the market closed today, Fitch Investors Service rated GNT's latest series of $136.2 million home improvement loan certificates as well as GNT's $104.2 million home equity loan certificates as 'AAA.'

Green Tree will report quarterly earnings early next week. Analysts are expecting EPS of $0.53, which would constitute a nice 20% increase over last year's $.044. At its current price under $31, GNT trades at 14-times expected EPS of $2.19 for the FY ending in December.

Speaking of upcoming earnings, Texas Industries (down $ 5/8 today) will issue its quarterly and fiscal year report at the end of this week. The EPS projections listed in First Call for TXI look a bit squirrely to me. For the full FY, which ended in May, three analysts have offered $6.65, $6.70 and $6.75 as their guesses. Through nine months, TXI made $4.83.

So if I've pushed the buttons on my ancient TI-55 correctly, that would yield a range of $1.82 to $1.92 for the fourth quarter, yes? So why then does First Call list two quarterly estimates, of $1.92 and $1.97? Beats me. My understanding is that the FY numbers are the ones to pay attention to.

As long as I'm focusing on stocks that fell today (and not all of them did), note that Prime Medical's secondary offering of just under 10 million shares should come off sometime this week. PMSI lost fifty cents, to close at a bid of $16 1/8.

Borders Group was unchanged on Monday. Over the week-end, I visited the Borders by the Water Tower in Chicago and the one in Deerfield, IL, contributing my share to BGP's revenues during those visits. Among my purchases was Professor John Ritchie's newly revised edition of _Fundamental Analysis_. (I know: Boring.)

Three Borefolio issues managed decent gains despite Monday's sell-off. Shaw Group picked up $ 3/8 on decent volume, presumably as news of its recent quarterly earnings report filtered through the market. Oxford Health Plans gained $ 3/8, as well, demonstrating once again its resilience around the $40 level. OXHP may have benefited from news that the Feds quietly shelved plans that would have limited HMO's profits arising from cost controls on services to Medicaid and Medicare patients.

Finally, Cisco Systems tacked on $ 7/8 on Monday, as the internetworking group managed a decent showing despite the NASDAQ sell-off. After the closing bell, StrataCom (which Cisco intends to acquire soon) posted quarterly EPS of $0.22, beating the high end of analysts' projections by a penny.