The Motley Fool: The Boring Portfolio

ANN ARBOR, Mich. (Sept. 22, 1998) -- Markets closed mixed Tuesday, with the Dow giving back 38 points but the S&P 500 and Nasdaq rising 0.48% and 1.03%, respectively.

As for the Boring Portfolio, it gained 1.69%, with winners outnumbering losers five to three. Atlas Air's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CGO)") else Response.Write("(NYSE: CGO)") end if %> stock was lifted $1 3/4 to $26. Shares of FelCor Lodging Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FCH)") else Response.Write("(NYSE: FCH)") end if %> rose for the sixth time in the past seven sessions, gaining $1 7/16 to $24 5/8 on surprisingly strong volume for this second day of Rosh Hashana.

A story in the current issue of Business Week focuses on a topic of abiding interest around here -- namely, the many worthwhile investments to be found among small- and medium-cap stocks. By now, most of us are familiar with the basic facts: despite their often superior sales and earnings growth as compared with that of their blue-chip brethren, their attractive valuations, and their limited exposure to ailing foreign markets, smaller stocks have gotten trampled this year as the herd has stampeded into index funds. The quest for easy liquidity in a turbulent market has additionally favored the big caps.

The S&P 500 may be up only about 6% since January 1, but the Russell 2000 index of smaller capitalization stocks is down more than 16%, and it has tumbled a certifiable bear-market 25% since hitting its high just five months ago.

According to Business Week, some small-cap fund managers believe that even if we've not yet hit dead bottom, the values are just too compelling to pass up. Here in the Boring Portfolio, we've never claimed to know how to time markets. But we do believe we can recognize good value when it smacks us between the eyes, and right now we find ourselves walking headlong into one bargain-priced stock of a high-quality smaller company after another.

In the Business Week article, Roger Glenski, co-manager of Wachovia Special Values, casts a vote for A.O. Smith <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOS)") else Response.Write("(NYSE: AOS)") end if %> -- an old favorite of Boring Stocks aficionados. Based in Milwaukee, A.O. Smith makes motors for air conditioners, washers, and other household appliances and is a leading manufacturer of residential and commercial water heaters. The company's Website may be found at, I kid you not, http://www.hotwater.com/.

Some investors believe that economic growth in the U.S. will slow considerably in the coming year and that companies exposed to industrial and construction markets will be particularly hard hit. Obviously, an economic downturn would do A.O. Smith no favors. On the other hand, washing machines and water heaters wear out pretty much without regard to how the economy may be doing at the moment, so the replacement market should remain strong for A.O. Smith even if some of its other business temporarily, um, tanks.

At any rate, one must wonder how cheap a stock has to get before the possibilities for bad news are amply factored into the share price. With A.O. Smith, you've got a company that analysts continue to believe will earn $1.82 per share this year (which would constitute nothing less than a 38% increase over 1997's $1.33) and $2.20 next year (or a 21% gain), according to Zack's. (Value Line offers essentially the same forecasts.) The company's balance sheet is solid, with a debt to equity ratio of about .26.

Yet at its recent price of $21 1/2, down 40% from its 52-week high, AOS trades at less than 12 times this year's projected earnings and only 1.3 times book value. One other thing: AOS pays a decent dividend, currently around 2.2%.

The Borefolio's own Pentair <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PNR)") else Response.Write("(NYSE: PNR)") end if %> and Carlisle Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSL)") else Response.Write("(NYSE: CSL)") end if %> are two other smaller, industrially-oriented companies whose stocks are trading at multiples to projected 1998 earnings in the low double-digits. We reviewed those fine companies here last Monday and Tuesday.

Not into industrials? Then what about Timberline Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TMBS)") else Response.Write("(Nasdaq: TMBS)") end if %>? Based in Beaverton, Oregon, this company makes accounting and cost estimation software for construction contractors and rental property managers. Return on assets is 24%; return on equity, a stunning 46%. Fifteen percent net profit margins, zero long-term debt. Timberline's Website offers additional information about the company and its products.

At a market capitalization of under $200 million, Timberline is virtually invisible to the investment community. The lone analyst picked up in the Zack's survey offers an EPS forecast of $0.94 for 1998 (up 47% over last year) and $1.17 for 1999 (which would constitute a 24% gain). At a recent price of $17 3/4, TMBS has been chopped well back from its recent high of $27 1/2 and trades at only 15 times next year's earnings estimate.

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09/22/98 Close

Stock Change Bid ANDW + 1/4 12.50 CGO +1 3/4 26.00 BGP + 11/16 26.00 CSL - 1/4 37.25 CSCO + 5/8 62.88 FCH +1 7/16 24.63 PNR - 3/8 27.94 TBY - 1/16 6.13

                   Day   Month    Year  History 
         BORING   +1.69%  11.09% -13.67%   8.63% 
         S&P:     +0.58%   7.55%   6.12%  65.66% 
         NASDAQ:  +1.03%  13.25%   8.11%  63.10% 
  
     Rec'd   #  Security     In At       Now    Change 
   6/26/96  225 Cisco Syst    23.96     62.88   162.47% 
   2/28/96  400 Borders Gr    11.26     26.00   130.98% 
   8/13/96  200 Carlisle C    26.32     37.25    41.50% 
    3/5/97  150 Atlas Air     23.06     26.00    12.76% 
   11/6/97  200 FelCor Sui    37.59     24.63   -34.49% 
   4/14/98  100 Pentair       43.74     27.94   -36.13% 
   5/20/98  400 TCBY Enter    10.05      6.13   -39.02% 
   1/21/98  200 Andrew Cor    26.09     12.50   -52.09% 
  
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  225 Cisco Syst  5389.99  14146.88  $8756.89 
   2/28/96  400 Borders Gr  4502.49  10400.00  $5897.51 
   8/13/96  200 Carlisle C  5264.99   7450.00  $2185.01 
    3/5/97  150 Atlas Air   3458.74   3900.00   $441.26 
   5/20/98  400 TCBY Enter  4018.00   2450.00 -$1568.00 
   4/14/98  100 Pentair     4374.25   2793.75 -$1580.50 
   11/6/97  200 FelCor Sui  7518.00   4925.00 -$2593.00 
   1/21/98  200 Andrew Cor  5218.00   2500.00 -$2718.00 
  
                              CASH   $5750.59 
                             TOTAL  $54316.22