Boring Portfolio Report
ANN ARBOR, Mich. (Dec. 31) -- As I soared home from San Diego today, the
Dow and the S&P 500 lost altitude. Strong readings on new-home sales
and consumer confidence tanked the bond market, and stocks pretty much followed
along. The DJIA lost 101 points. Big board volume was surprisingly strong
for a New Year's Eve: nearly 400 million shares. The S&P 500 dropped
13 points, or 1.74%, one of its worst sessions in quite some time. The Nasdaq
managed a 3 point gain (+0.25%) on this last day of 1996, however. Nasdaq
trading totaled an intense 632 million shares.
For the full year, the Dow advanced by 1331 points, or 26%. The Nasdaq was
right behind, at 22.7%, while the S&P 500 rose 20.2%.
The Boring Portfolio commenced operations on January 29, 1996. It's first
two purchases were shares of semiconductor equipment supplier Kulicke &
Soffa (KLIC) and concrete and steel-maker Texas Industries (TXI), neither
of which is a current holding. In eleven months, the Borefolio has risen
15.07%, hampered somewhat by the ramp-up time it took at the outset to become
reasonably fully invested in the market.
In 1996, the Borefolio sold four stocks for losses: K&S, Potash Corp.,
Lam Research, and LCS Industries. Three winners were liquidated: TXI, Shaw
Group, and Zytec. Among current holdings, there are six net winners to date,
one loser (software giant Oracle Corp., down 14.4%, including transaction
costs), and two recent purchases that are essentially unchanged in price
(Solectron and Tidewater).
On this last day of 1996, the Borefolio suffered a 0.41% loss, making it
3.90% in the hole for the rough month of December. Five holdings lost ground,
including a $1 loss for Tidewater. Merrill Lynch today reportedly lowered
its intermediate-term ratings on a batch of oil exploration concerns, a move
that rippled through many related stocks, including Tidewater.
On the up side, Oxford Health rose $3/4 and Carlisle Companies gained an
eighth to extend its move into the $60-range in advance of a 2-for-1 split
on January 2.
Since it's the end of the year, I thought it might be appropriate to take
a few moments to look back and consider what investing lessons I've learned
over the past 11 months. At least three such lessons come immediately to
mind. I'll review the first of them tonight and will discuss the others in
subsequent columns.
Easily the most important lesson I (re)learned in 1996 is this: Be relentlessly
disciplined about selling a stock when its price gets noticeably ahead of
fair value. A good stock can always be repurchased later at a lower price
-- or even at a higher one, if it makes sense to do so.
The history of four Borefolio trades drove this lesson home to me. Those
trades involved shares of Texas Industries, Prime Medical Services, Zytec,
and The Shaw Group.
I bought 100 shares of TXI on January 29 at a price of $54, with the stated
expectation that, based on earnings projections, the stock could reach $60
by mid-year and perhaps $70 by year's end. As it turned out, barely six weeks
after I made the buy, TXI had hit $69 -- a 28% gain in less than two months
for rocks and steel. Had TXI's story changed materially in those weeks so
as to justify an upward revision in my target price? Not really. Should I
therefore have sold? Yes.
Pretty much the same thing happened with Prime Medical Services. I bought
400 shares of PMSI at $10 on March 8. My initial target price was $14, which
was later revised to $18, based on upwardly revised prospects for earnings.
But PMSI soon reached $18 ... and plowed right ahead to $21 in less than
three months. Should I have sold PMSI -- or at least part of the holding
-- after the share price had doubled so rapidly? Absolutely.
Well then, why didn't I sell TXI and PMSI? Two reasons, I think. First, I
had just gotten the portfolio under way and was reluctant to liquidate a
substantial chunk of the portfolio's investments so rapidly. I didn't yet
have any fully-developed ideas of where to put the money if I sold, and I
admit to being a bit gun-shy about establishing a reputation as a fast-buck
trader so early in the game. Also, I *liked* the companies and I was just
getting to learn more about them; that added to my reluctance to sell.
As it turned out, both stocks corrected sharply over the balance of 1996,
to where they are now selling slightly below my estimate of fair value, in
the case of TXI, and substantially below my (and analysts') estimate of fair
value, in the case of PMSI.
The flip side of this lesson is brought home through a review of my trades
in Zytec and Shaw Group. Those were two stocks that I sold promptly when
they exceeded my estimates of fair value; and in both instances it turned
out to have been the right move.
Zytec, you may recall, makes power supply components for leading electronics
manufacturers, such as Hewlett-Packard, Cisco Systems, and IBM. Following
a nice run-up in the share price early in the year, traders dropped ZTEC
after the company "merely" met its own ambitious quarterly targets in late
April. I had been following the company but had declined to buy the stock
at what I considered to be a somewhat inflated price. So when the correction
occurred, I quickly took advantage, purchasing 200 shares at $26 3/4 on April
29.
Partly because The Motley Fool drew attention to the stock -- and partly
because I was not the only person in the world who spotted the opportunity
presented by a temporary lapse in market efficiency -- ZTEC quickly resumed
its climb. In only one week the stock had zoomed to $47 -- well beyond my
publicly stated fair-value estimate of $35 -- and it showed no signs of slowing.
This time around, however, I wasted not a moment in issuing my "sell" notice.
The stock soon collapsed, and various offline publications blamed "Internet
stock chatter" for the stock's rise and demise. Those publications ignored,
of course, both the stock's strong move prior to my purchase and the reasoning
behind my decision to sell. As it has turned out, ZTEC has never yet exceeded
the price at which I decided to sell, and following a two-for-one split,
it now trades around $11.
The Borefolio's experience with The Shaw Group was similar in many ways to
the Zytec affair, although thankfully minus the accompanying hype instigated
by paper-and-ink publications.
Shaw Group is in the marvelously boring business of designing and fabricating
the piping for power plants, refineries, and similar operations. The company
is a leader in its field and operates some of the world's most technologically
advanced machinery for bending large diameter pipes to specification.
After researching the company and the stock, I bought 300 shares of SHAW
at $18 3/8 in mid-April. After the purchase, various participants in The
Motley Fool offered their estimates for a fair target price, and I offered
my own: around $30 "by early next year," based on estimated year-end EPS
of $1.75 and what I took to be a fair multiple in light of projected sustainable
earnings growth over the next few years.
When the stock hit $29 1/4 after barely three months, I dutifully sold 200
of the 300 shares, holding the remaining 100 in reserve, out of respect for
SHAW's formidable run and the differences of informed opinion in Fooldom
regarding the stock's fair value. When the price continued on to $37, however,
I decided that it was time to liquidate the remaining 100 shares, and did
so in late September.
The stock never made it above $37, and following announcement of a secondary
share offering, which the company had indicated for some time it might wish
to pursue, SHAW rapidly lost nearly half its value. Today, the stock -- which
has since moved to the Big Board and trades under the symbol SGR -- trades
around $23.
Is the moral of this story that you're guaranteed of a superior return in
the market if you sell when you judge a stock has moved beyond fair valuation?
Negative. We all know that stocks don't come with guarantees.
Is it fair to say, however, that the odds favor folks who are as disciplined
in selling stocks as they are in buying them in the first place? I, for one,
think so. And that's exactly what I intend to do from here on out.
Here's wishing you a peaceful and prosperous New Year. See you in 1997!
Tuesday, December 31, 1996
Stock Change Bid
--------------------
BGP - 1/4 35.88
CSL + 1/8 60.50
CSCO -1 1/4 63.63
GNT - 1/8 38.63
ORCL --- 41.63
OXHP + 3/4 58.50
PMSI - 1/8 10.88
SLR + 1/4 53.38
TDW - 1 45.25
Day Month Year History
BORING -0.41% -3.90% 15.07% 15.07%
S&P 500 -1.74% -2.15% 19.16% 19.16%
NASDAQ +0.25% -0.12% 24.02% 24.02%
Rec'd # Security In At Now Change
2/28/96 200 Borders Gr 22.51 35.88 59.36%
2/2/96 200 Green Tree 30.39 38.63 27.11%
5/24/96 100 Oxford Hea 48.02 58.50 21.81%
6/26/96 100 Cisco Syst 53.90 63.63 18.04%
8/13/96 100 Carlisle C 52.65 60.50 14.91%
3/8/96 400 Prime Medi 10.07 10.88 8.01%
10/15/96 100 Solectron 54.52 53.38 -2.11%
12/23/96 100 Tidewater 46.52 45.25 -2.74%
11/21/96 100 Oracle Cor 48.65 41.63 -14.44%
Rec'd # Security In At Value Change
2/28/96 200 Borders Gr 4502.49 7175.00 $2672.51
2/2/96 200 Green Tree 6077.49 7725.00 $1647.51
5/24/96 100 Oxford Hea 4802.49 5850.00 $1047.51
6/26/96 100 Cisco Syst 5389.99 6362.50 $972.51
8/13/96 100 Carlisle C 5264.99 6050.00 $785.01
3/8/96 400 Prime Medi 4027.49 4350.00 $322.51
10/15/96 100 Solectron 5452.49 5337.50 -$114.99
12/23/96 100 Tidewater 4652.49 4525.00 -$127.49
11/21/96 100 Oracle Cor 4864.99 4162.50 -$702.49
CASH $5999.08
TOTAL $57536.58
Transmitted: 12/31/96