I'll trade you Rich - Barron's article for Carpino's exact words - <ggg>
(You have to send it now!) <VBG>
Part 1
After the Deluge
With stocks on the rocks, our pros spot values
By Lauren R. Rublin
Whew! The past five months have put a few-or at least a few
moregray hairs on the heads of anyone who has tried to navigate
the financial markets, in particular that roller coaster known as
Nasdaq. All things considered, the members of the Barron's
Roundtable did the job admirably over this tumultuous span (see
"Progress Report"), in which the bursting dot.com bubble and
lesser pullbacks in other frothy issues paved the way for value to
come to the fore.
In the second half of 2000, our pros
hope to repeat their storied successes
while sidestepping the market's excesses,
of which they expect notably fewer, thanks in part to the
interest-rate medicine lately doled out by the Federal Reserve.
They're buying financials and energy shares, "deal" stocks and
European issues, just to mention a few of the investment ideas
you'll find in the pages that follow. In telephone check-ins over
the past 10 days, these investment luminaries also shared their
piquant views on politics, currencies, financial speculation and
the next new thing in the Internet revolution. We don't want to
spoil the surprise here, so read on.
Art Samberg
Barron's: You warned us in January the markets would be very
volatile this year, Art. Whom can we sue for whiplash?
Samberg: The Nasdaq has been cursed by volatility. Some of
the volatility numbers have been published, and they just blow
my mind. How do I account for it? The first stage of the
revolution is over. Maybe even the second stage. The Internet is
a defining moment in economic history. In the first stage the
market is not going to be very discerning, because its function is
to raise capital and sustain the revolution for as long as possible.
People who did not understand that walked away too soon. I
was interested in America Online in 1994 because I thought it
was the start of that first phase. I was not at all distressed by the
speculative bubble, because I thought it was healthy for the
development of the trend, if not necessarily markets.
Q: Don't tell that to the guy who got caught in the bubble when
it burst.
A: That phase is over, and the repercussions will be seen as
more and more venture-capital funds 'fess up to some of the
losers in their portfolios.
Q: When does the next stage start, and how is it going to
unfold?
A: It's got to come from lower levels, because metrics like
price-to-sales are no longer relevant. I mean, they're almost
laughable at this point. The only thing that really matters now is,
when are you going to turn a profit? When are you going to be
cash-flow positive? If you tell me it's late next year, my eyes are
probably going to glaze over because I won't believe you. The
days of free capital are over, and there aren't many companies
that will make the cut. The other question is, are things like
Amazon.com and Priceline.com for real? They are strong,
powerful companies with unique business models, but they
might never be enormous moneymakers. There are so many
cross-currents. As the dot.com spending disappears, will that
influence total spending in the area in a measurable way? What
happens when big companies like General Electric focus on all
of this?
Q: More immediate, how do
you think the market will wind
up the year?
A: We all know what the issues
are, but I don't know the
outcome. I follow the
fundamentals of companies and
the emotion of the crowd, and
watch very carefully how the
market is voting. I think "buy
the dips" will work because this
is a long cycle. But the
parameters of what you buy on the dips clearly change. At least
for the remainder of this year, and probably forever, you want
to buy dominant companies in areas where all kinds of good
stuff is happening. That's why we like Gemstar International,
which is a strange animal in that it's an intellectualproperty
company. But it incorporates all the attributes that made the
prior generation of 'Net companies like Yahoo, AOL and, in
some ways, Microsoft very successful.
Q: How so?
A: Interactive TV is a huge market, and Gemstar has tied up the
intellectual-property rights to the electronic programming guide.
When you get into the digital age with hundreds of channels,
you can't live without it. People have fought the validity of this
copyright protection, but now Microsoft, John Malone and
others have signed deals with the company. Right now Gemstar
just has a programming guide, but in the future it will be an
advertising medium. The company is in the process of merging
with TV Guide, in a deal that everyone hoped would be done by
the end of June. The government is still reviewing the
combination. Even if it doesn't happen, TV Guide would still
have to pay Gemstar royalties. Here's another thing: Gemstar
made two acquisitions in the electronic-book area in January,
which no one has paid attention to. They have patent encryption
technology to protect themselves from piracy. The music
industry wasn't on top of this, but the book industry is smarter.
Q: Let's go to the numbers. Where is
Gemstar trading?
A: The stock is at 52 [it has since fallen to $46], and the
company has $23 billion in combined market value, assuming
the acquisition of TV Guide. In the fiscal year ended March
EBITDA mearnings before interest, taxes, depreciation and
amortization] was $131 million. This year, who knows? It could
be anywhere from $280 million on up. Sales last year were $241
million. This year they could do about $1.15 billion. The stock
has been all over the map, like everything in my portfolio. But I
love the story.
Q: How about another pick, Art?
A: McLeodUSA is a bit more staid. It was founded by Clark
McLeod, a terrific entrepreneurial manager. The company is
going into the CLEC [competitive local exchange carrier] space,
which is similar to Time Warner Telecom, which I talked about
in January. McLeod's business is concentrated in the Midwest
and Rocky Mountain states. A few months ago the company
bought a data network and over time it plans to transition its
own voicecentric network into a nationwide voice and data
CLEC. Clark McLeod got $1 billion from Forstmann-Little, and
the business is growing dramatically. Revenues of $1.1 billion
this year will climb to $2.6 billion in 2002. EBITDA could go
from $55 million to $505 million. It's just a high-quality way to
play broadband access. My third pick is Abgenix.
Q: The mouse company?
A: The company has developed a transgenic, fully "humanized"
mouse to use in drug testing and development. Its technology
significantly shortens the testing process to three to four months.
Abgenix will get a piece of the royalty stream on products
developed by drug companies using the mice, and it's also
developing drugs in-house. The company has more than $500
million in cash, which is good because payday is a few years
out. They get milestone payments as the drug companies'
clinical trials proceed, however. By 2005 the antibody market is
expected to be $7-$8 billion. If you assume royalties are
4%-5%, you're talking an available market of $300-$400 million,
which all drops to the bottom line. The stock trades at around
140 and the company has a market cap of $5 billion. Having
said that price-to-sales doesn't matter on the dot.coms, I'm now
giving you an absurd price-to-sales ratio and saying I don't care.
Why? Because it is a patentable technology with clear economic
benefits to the user.
Q: What a world! Thanks, Art.
Mario Gabelli
Barron's: It's been a wild five months for investors. What now,
Mario?
Gabelli: A year ago the Dow was at 10,700. As we speak, it's
near 10,700. Yet in the past 12 months we've had an enormous
number of opportunities to make money, both in trading and
takeover situations. I think the next 12 months will be much like
the past 12 -- that is, just volatility in valuations. The big change
is that we'll have a new Administration in six months. It's not
significant in terms of the Presidency, because we've survived
all types. But it could have an incredible impact on the attitudes
of appointees at various government agencies.
Q: Such as the the Justice Department.
A: One could argue that Microsoft's problems would not exist
under a different Administration. Secondly, if the Republicans
control all branches of government, you could see a different
attitude at the Federal Communications Commission. If Colin
Powell's son becomes chairman, for example, new policies could
provoke another round of consolidation in the telecom and
media business, allowing American companies to size up to
compete more effectively globally. If the Democrats win, on the
other hand, the new chairman might take an even more
Draconian approach to regulation. There could also be lots of
changes with regard to tax policy. As for the big picture, a new
President wants to get re-elected. Therefore, if we're going to
have a slowdown to rebalance the world, the new guy will want
it early in his Administration. Using macroeconomic policy to
cool things off could have a chilling effect in 2001.
Q: We trust you'll still find some worthy investments.
A: The landscape will be characterized by even more global
transactions. Hostile bids. Overbids. Lots of financial
engineering. Everybody repositioning himself. That's how
capitalism in its freest form is supposed to work. I want to
re-recommend Chris-Craft Industries, which I talked about back
in January. The stock is trading at 64. Under the FCC's duopoly
regulations, put in place last August, a company now can own
more than one television station in a given market. Chris-Craft,
through its controlling stakes in BHC Communications and
United Television, has stations in excellent locations. Those
stations would complement Viacom's properties. It's logical to
assume that Chris-Craft will be sold, and that Mel Karmazin
[president of Viacom] will be the buyer, now that Viacom's
merger with CBS has been blessed.
Q: What is Herb Siegel's
asking price?
A: Herb Siegel [chairman of
Chris-Craft] needs to be a little
more flexible in his negotiating
tactics, but investors will make
a return that is not
uncomfortable, given my view
that the market will be flat.
Granite Broadcasting is another
name I'd like to revisit. The
stock is selling around $6
because the company structured a 10-year affiliate deal with
NBC in the San Francisco area that basically destroyed the
economics of the affiliate arrangement. Granite followed bad
advice. If they tweak the deal, which I think they'll do, they will
give themselves more financial flexibility. Also, NBC will have
to lift its foot from its affiliates' throats, because it is in their
mutual self-interest. Granite can go from $6 to $12 overnight
just by making some changes in a dumb deal.
Q: Have you any new names for us?
A: Modine Manufacturing is a stock I've owned before. It's
selling at 25 and there are some 30 million shares outstanding.
The company will earn about $2.25 a share this year-another
year of disappointing results. But earnings could accelerate to $3
in 18 months, with some new business coming in. The company
makes radiators and other sophisticated heat-transfer equipment.
It's got good technology and R&D. Modine recently announced
a pact to develop fuel-cell components with Xcellsis, a joint
venture involving DaimlerChrysler, Ballard Power Systems and
Ford. If the fuel cell works, the company could get a 20 multiple
on $3 earnings, which would translate into a $60 stock. That's a
lot of upside.
Q: By the way, what do you think of Seagram's pending sale to
Vivendi?
A: Seagram near 60 is no longer "on the rocks." Smile! At
current prices, you'll get 0.80 of a share of Vivendi, worth about
68 per Seagram share. With Seagram at 58, you can make 10
points, or 16%. That is not a shabby return. Now, what to do
with Vivendi? We own Vivendi, but it is not a takeover play. It
is a global growth company with strategically attractive assets.
We tend to like takeout plays. For those who follow the Gabelli
style of looking for companies with takeover potential, your
money could be better served in other things.
Q: Got the picture. Thanks, Mario.
Archie MacAllaster
Barron's: How do you read this market, Archie?
MacAllaster: Stocks are pretty high, and interest rates aren't
helping any. The averages probably aren't going to do much for
a while. But the best thing about this market is that it's cracked a
lot of the excesses without killing everything. The reason, I
think, is that there's so much more money out there chasing
stocks. Everyone's on the in. They take them high, they take
them low, but they've got to have action. In my opinion,
investors are concentrating way too much on the short term. But
my opinion's gotten to be a little lonely.
Q: We know what you mean. What are you buying these days?
A: First, I want to comment on Frontier Oil, which has moved
up a little since I recommended it in January at 6 11/16. The
company reported a loss of 22 cents a share in the first
quarter-more than I had expected. Frontier relies entirely on
refining now, and is very sensitive to crack spreads [the
difference between crude prices and prices for refined petroleum
products]. The company loses a lot of money if the crack spread
is less than $4 a barrel, as was the case earlier in the year. But
spreads since have moved above $10, and if they remain near
here, Frontier could earn as much as $1.50 in the second
quarter. The balance sheet is highly leveraged, but there's also
enormous operating leverage. Eventually, crack spreads will
narrow, but right now you've got a $7 stock that has the
potential to earn $2-$2.50 for the year. The situation has
changed a lot since January, and I just want to bring it to
readers' attention.
Q: Consider it done. What else have you?
A: MONY Group, which I recommended earlier in the year, still
is exceptionally cheap, even though it's moved up to 31 1/2 from
around 27. There are 47 million shares outstanding. Book value
was $40.71 at the end of the first quarter, and the company
pays a dividend of 40 cents. As a mutual insurer MONY had
profit margins of 6%, but the company expects to have 10%
margins by 2003. The board has authorized the repurchase of
5%, or about 2.3 million shares, and management has bought in
about 800,000 shares since February 1 at an average price of
just under $30. Operating earnings in the first quarter were
$2.60 a share, but that included $1.99 of partnership profits. So
profits from operations were about 61 cents, up from 45 cents.
For the full year MONY will earn over $5 a share, including
$2.50 of partnership profits. Basically, the company's a natural
for a European acquirer.
Q: Have any come calling?
A: Under de-mutualization -- this is the old Mutual of New York
-- MONY could not grant options for a number of years. You
can bet these people will not be sellers until they get their
options, which is happening now.
Q: How fortunate for
shareholders.
A: My next pick is a
high-multiple stock Flextronics
International. It sells for about
64 [the stock since has moved
up to 71], although it's come
down from a high of 79. There
are 200 million shares
outstanding. The company
earned $1.14 a share in the
year ended March, and could
do $1.65-$1.75 in fiscal 2001. So it's selling for about 38 times
estimated profits. Last year Flextronics had sales of $5.7 billion.
The company's growing about 50% a year and recently signed a
five-year, $30 billion deal with Motorola, which will produce
sales of $10 billion in the fifth year. This year sales will jump to
$9.5 billion. Flextronics' gross profit margins are about
10%-probably the highest in the industry.
Q: What's the downside here?
A: You're going to get very wide swings in the stock. Also,
Flextronics is getting so much business there's a risk the
company won't be able to handle it efficiently. One bad quarter
and these kinds of stocks sell off 25%, 30%, 40%. But if you
look ahead two or three years, you'll see a company three or
four times its current size, and I believe you'll make a lot of
money.
Q: What else charms you?
A: I haven't mentioned Polaris Industries in some time. The
company makes water craft and all-terrain vehicles, and is the
largest snowmobile producer. But it's come down sharply in
value. Polaris now sells for 31 1/2 and it earned $3.07 a share
last year. So it's selling for close to 10 times earnings, which is
below its annual growth rate of 12%-15%. The company pays
an 88-cent yearly dividend and yields about 3%. This year
Polaris could earn $3.45 a share. The other attraction, frankly, is
that Thomas Tiller, the CEO, indicated to the Minneapolis
Star-Tribune back in February that he would not rule out taking
the company private if investors remained unwilling to pay a
reasonable price. In a takeout we think the company could fetch
$45-$50.
Q: Thank you, Archie.
Cover Story, Part 2 |
