February Update

For the month of February the Model Portfolio’s return was -1.5% versus S&P 500’s total return of -2.0%.

February ended with a bang. The market went on a wild ride over the last couple of days of the month. Fears of a recession sparked by comments from Alan Greenspan combined with a sharp drop in the Chinese stock market did not bode well and investors were hitting the sell button.

Before all this happened, as you may have noticed, the portfolio was having a busy month. High turnover is not something we strive for. However, we used the run up in prices of various positions as an opportunity to consolidate and build a more concentrated portfolio.

The original intent of the Wendy's (NYSE: WEN) trade was to buy before the spin-off of Tim Hortons (NYSE: THI). That thesis played out well and we recognized a profit in excess of 30%. Similarly, our thesis on Heinz (NYSE: HNZ) played out as Mr. Peltz succeeded in joining the board and the company began implementing the various strategic measures he was advocating. Walter Industries (NYSe: WLT) continued to struggle after spinning off Mueller Water (NYSE: MWA). We decided to eliminate our position in Walter at a small loss and instead built a bigger position in Mueller Water which we believe has fantastic prospects and is deeply undervalued. At Walter, coal production has not picked up and coal prices have been under pressure. Both problems may well prove temporary. However, we believe we have effectively redeployed our capital by adding to existing positions and by adding two new holdings in the energy sector - ConocoPhillips (NYSE: COP) and Diamond Offshore (NYSE: DO) both of which we recently mentioned in Margin of Safety. Finally, we eliminated our position in Mittal (NYSE: MT) with nearly a 50% return, keeping Chaparral as our only holding in the steel sector. The steel sector has shown signs of stabilizing and with price increases planned later in the year. Consolidation is expected to continue apace.

In February, a few more earnings reports trickled in. Electronics Arts (Nasdaq: ERTS) came in with good numbers and was subject of a positive article in Barron's. Our thesis remains intact on this company. CBS (NYSE: CBS) hiked its dividend and announced a large buyback. Meanwhile, the market seemed spooked by Expeditors International's (Nasdaw: EXPD) earnings which appeared to miss 'expectations' and the stock sold off almost 10% at the open before recovering. This is a solid business and a great way to play globalization. Peter Rose, Chairman and CEO, had this to say, "Looking forward to 2007, there is no time to rest on past success. We cannot lose touch with what's most important - our people and our customers. And we cannot forget 'from whence we've come'." Meanwhile, Cisco (Nasdaq: CSCO) surprised us all. Their earnings report was stellar and the guidance was not too bad either. Last but not least, Morningstar (Nasdaq: MORN) continued to roll along with a great quarter and capped it all off with the acquisition of S&P's mutual fund data business providing the company with a presence outside of the U.S.