The Motley Fool: The Boring Portfolio

ANN ARBOR, Mich. (Oct. 14) The Dow managed to close above 6,000 today, gaining 41 points despite thin Columbus Day trading. The Nasdaq also hit a record high, gaining 8 points, or 0.65%. The S&P 500 advanced 3 points (+0.41%) to set its own new high.

Last Friday, with an eye toward assessing whether some changes in the Borefolio were in order, I reviewed four Boring stocks: Borders, Carlisle, Cisco, and Green Tree. I decided that all four amply merit their slots in the Borefolio. I had intended to review the remaining four holdings today, but breaking Borefolio news obliges me to delay that, probably until tomorrow.

Today's news is that I'll be adding 100 shares of Solectron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLR)") else Response.Write("(NYSE: SLR)") end if %> to the Boring Portfolio on one of the next five trading days. My transaction report for Solectron is available elsewhere in the Boring Stocks section of The Motley Fool. SLR hit a new high of $52 3/4 today.

The other thing I want to do tonight is clear up some confusion about recent news from Green Tree Financial, which lost $ 3/4 today.

Green Tree recently announced that it will "enhance" about half of its securitized net interest margin certificates (NIMs). Because these NIMs are fairly esoteric financial instruments, some GNT shareholders (me, for one) were unclear what the consequences of this action are for the stock. This confusion may have weighed upon the share price a bit the past few days.

Based on some help from a report by Merrill analyst Michael Millman as well as a conversation I had today with John Dolphin, VP in charge of investor relations at Green Tree, I'm going to *try* to clear this NIM stuff up. Ready?

NIMs are a kind of security that investors buy. Unlike the more conventional asset-backed securities Green Tree offers, which are backed by loans on manufactured homes or other big-ticket items, NIMs are collateralized by the expected stream of income Green Tree gets from servicing the mortgage loans. You see, Green Tree not only securitizes the income stream coming from the loans, it also securitizes the income stream coming from the its piece of the take for servicing the loans. Pretty wild, in a green eyeshade sorta way.

Anyhow, in 1994 and '95, Green Tree offered three NIM deals, valued at a total of $900 million. The value of the NIMs was based upon projections of the prepayment and default rates for the underlying loans. As Green Tree has expanded its loan offerings to folks at both the top and bottom ends of the credit spectrum, however, those original projections began to lose touch with reality.

Here's why. Loans to folks at the top of the credit spectrum tend to have higher than average balances. Although very profitable, those loans also tend to get prepaid at a higher than average rate. NIM holders, who bought the securities with certain time horizons in mind, don't particularly like that. At the other end of the credit spectrum, loans to folks with higher credit risk can generate above-average profits (because their loans are made at comparatively higher rates), but they also carry a higher chance of default.

Owing to both the quicker repayments at the high end and the somewhat higher than projected default rate at the low end, the NIMs began to lose value. Green Tree was not obliged to do anything about this (after all, securities entail risk), but the company elected to "enhance" the NIMs by in effect loaning money to them. That money (around $500,000 in the first year, declining thereafter) all comes back to Green Tree eventually. The company loses the use of the money in the meantime, though.

That modest downside will not affect Green Tree's income statement at all, according to Mr. Dolphin. The upside is that Green Tree's fine reputation and credit rating is further bolstered. Indeed, the Wall Street Journal reported last week that investors who followed the situation closely were buying up the NIMs on the secondary market like hotcakes.

Green Tree will report its third quarter earnings on October 22. Analysts are looking for EPS of $0.61, which would constitute a 17% increase over a year ago. As always, we'll be covering the report and conference call right here.

TODAY'S NUMBERS

BGP ---...CSL ---...CSCO - 1/2 ...GNT - 3/4 ...OXHP +1 5/8 
PMSI - 1/8 ...SPY + 7/32...TXI - 5/8 ...

*Scroll down or expand screen for full portfolio accounting

                   Day   Month    Year  History
        BORING   -0.22%  -1.08%  15.14%  15.14%
        S&P 500  +0.41%   2.36%  13.18%  13.18%
        NASDAQ   +0.65%   2.40%  20.69%  20.69%


    Rec'd  #   Security     In At       Now    Change

  2/28/96 200 Borders Gro    22.51     34.25    52.14%
   2/2/96 200 Green Tree     30.39     39.25    29.17%
   3/8/96 400 Prime Medic    10.07     13.00    29.11%
  6/26/96 100 Cisco Syste    53.90     65.13    20.83%
  7/23/96 100 S&P Deposit    64.15     70.44     9.80%
  8/13/96 100 Carlisle Co    52.65     57.63     9.45%
  1/29/96 100 Texas Indus    54.50     56.13     2.98%
  5/24/96 100 Oxford Heal    48.02     47.13    -1.87%


    Rec'd  #   Security      Cost     Value    Change

  2/28/96 200 Borders Gro  4502.49   6850.00  $2347.51
   2/2/96 200 Green Tree   6077.49   7850.00  $1772.51
   3/8/96 400 Prime Medic  4027.49   5200.00  $1172.51
  6/26/96 100 Cisco Syste  5389.99   6512.50  $1122.51
  7/23/96 100 S&P Deposit  6414.99   7043.75   $628.76
  8/13/96 100 Carlisle Co  5264.99   5762.50   $497.51
  1/29/96 100 Texas Indus  5449.99   5612.50   $162.51
  5/24/96 100 Oxford Heal  4802.49   4712.50   -$89.99


                             CASH   $8025.95
                            TOTAL  $57569.70