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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (483)	7/9/1998 7:53:00 PM
From: Axel Gunderson	Read Replies (1) \| Respond to of 1722

**************************************************************** "The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate." (Benjamin Graham) ************************************************************** Should Axel and Porc adapt to a change in the financial climate?** Something I forgot to note in my last posting - not only is the current differential between implied equity return and implied long bond return above average for the period since the start of 1970 - it is higher than it has been since the second quarter of 96. That differential reached a low in the second quarter of `97, getting down into the 1.15% range. On to new material. Porc has posed the idea that for the patient enterprising investor, the pickings should be somehow better now. For the most part, I don't see it. Looking at the free cash earnings of individual companies I follow, I do not see a higher (better than normal) percentage of them with attractive "coupons." Which leads us to an issue of portfolio management that merits some consideration at this point, IMO. Graham used to purchase a large number of companies. I have been more influenced by the methods of Phillip Fisher, and tend towards a more concentrated portfolio. Porc also prefers a concentrated portfolio, and we have done some lightweight probability analysis which supported our perspective. But my (and Porc's) portfolio preference is based upon the premise of only purchasing great companies. To put it succinctly, we seek non-market risk while simultaneously seeking to minimize business risk. But as Porc has also noted, the low hanging fruit seems to have mostly been picked. So how about some input (insights? questions?) on this: should we enterprising investors now purchase great companies when available at good prices, or should we purchase merely good companies (and more of them) at great prices? I personally couldn't go to what Buffett calls "cigar butt investing" but there are good companies, which perhaps don't have a place in a very concentrated portfolio, which might work well in a semi-concentrated (Berney-sized) portfolio. To illustrate this conundrum, I will offer as examples some companies which I have recently noted as seeming to be cheap. My intent is not to analyze the individual companies (though if anybody wants to really dig into any of them and share their findings with the thread, it would be great) but to offer enough background that the "dilemna" is more apparent. One company which I feel comfortable holding in a fairly concentrated portfolio, which currently seems inexpensive, is Deere (DE). Extremely strong financially, leader in their market, buying back shares. I also follow Case (CSE) which is a smaller, weaker competitor. I might not feel comfortable holding Case in an Axel-sized portfolio, but I would certainly feel comfortable holding Case in a Berney-sized portfolio. Case is, by my estimates, a decent amount cheaper than Deere. [As an aside, I took a look at the other makers of agricultural equipment. AGCO (AG) is not as financially strong as the others, but wow, talk about a high free cash coupon - and they have been buying shares back recently. New Holland (NH) seems to be cheap as well - Wayne? buddy pal friend colleague associate? Since you like to look at ADRs, wanna give a perspective on NH?] Some other companies that might be OK in a Berney-sized portfolio, and seem cheap: Paccar (PCAR) - they make trucks. Sorry, don't know much more. The following two show up in Value Line's list of stocks trading at a low multiples of working capital - sounds suspiciously like a starting point for followers of Mr. Graham. Avnet (AVT) - electronics distributor. My understanding is that the electronics distributors are fairly shielded from price fluctuations, and that business activity affects their profits most. Stratus Computer (SRA) - nearly $9 a share in cash, insider have bought recently at about $6 a share over the current price, and the company did pledge to repurchase shares. Even with their pre-announced loss, the revised estimates leave them with a high cash coupon. So returning to the topic, now that it can be seen in context, but still keeping it hypothetical: does it make more sense to purchase Deere, though it isn't as cheap, and maintain a more concentrated portfolio, which in itself abets differentiation from market returns, or to buy a basket composed of say Paccar, Avnet, Stratus, and either Case or AGCO, all of which are cheaper, as part of a Berney-sized portfolio? Axel

To: porcupine --''''> who wrote (483)	7/9/1998 8:21:00 PM
From: porcupine --''''>	Respond to of 1722

Boeing may raise 737 output to 30 a month SEATTLE, July 8 (Reuters) - Boeing Co. is considering raising production of its 737 model to as many as 30 airplanes a month from a currently projected peak of 27, a top executive of the manufacturer said Wednesday. Ron Woodard, president of Boeing's commercial airplane group, said the higher rate would be possible with the addition of an assembly line in Long Beach, Calif. -- a plan that is under consideration. Boeing currently produces 24 of the narrow-body 737s monthly, a rate that is projected to rise to a record 27 by the second quarter of next year, compared with just 10 a month in early 1997. Woodard said Boeing could assemble another three or four a month in the underused former McDonnell Douglas Corp. plant in Long Beach, although he said a decision would not be made until late this month. "We've got so much demand on the 737," Woodard told reporters before a delivery ceremony. "We've studied rates up to 30 (a month). It just depends on how the market comes together and how much long-term demand there is." Boeing is in the process of a raising the production rate of its next-generation 737 to 21 a month from 14, but Woodard said the manufacturer will continue to build the older "classic" version of the jet until early 2000. He said the Long Beach plant could be used to assemble special models such as the Boeing Business Jet or to work on military or cargo versions. Woodard declined to say how much it would cost to add needed tooling to the Long Beach plant. Boeing increasingly has focused on the market for narrow-body airplanes, particularly with the economic crisis in Asia sapping demand for new wide-body jets such as its 747. In its recent annual report on the state of the commercial aircraft market, Boeing predicted single-aisle jets would account for 70 percent of the units and 43 percent of the dollar value of new airplane deliveries in the next 20 years. While its competitor Airbus Industrie [ARBU.CN] is going ahead with plans to build a plane bigger than the 747, Boeing has concluded the market is too small for such a super-jumbo. Of the four commercial models Boeing inherited in its $16.3 billion acquisition of McDonnell Douglas last year, the manufacturer is phasing out production of all but the smallest, the short-haul 717, which is scheduled for its first flight in September. ((-- Seattle bureau 206-386-4848, marty.wolk@reuters.com))

To: porcupine --''''> who wrote (483)	7/9/1998 8:56:00 PM
From: Freedom Fighter	Respond to of 1722

Axel, One more thought. If risk premiums return to more average levels for this type of environment and ROE returns closer to average, it implies a possible very very significant decline in prices. Most likely there would be losses on many if not most stocks over the next 5-10 years even if there wasn't a crash. That is the reason for my caution. The upside is not much better than high grade corporates (and it may be lower) and the downside is a disaster. The biggest disaster being not having any cash when the real bargains and high returns become available. It has been my policy to not add any new serious amounts of money over the last year or so and keep my cash position high. There is simply not enough to be gained by adding new money and much to lose if opportunity knocks within a few years. I am also dabbling in a few short positions as a hedge since much of my own portfolio is overpriced but makes no sense to sell.