8/15/00 Bloomberg: Novell, Conseco Are Among the True Stock Bargains:J.Dorfman
cnetinvestor.com
Novell, Conseco Are Among the True Stock Bargains: John Dorfman
8/15/00 10:44:00 AM
Source: Bloomberg News
(Commentary. John Dorfman, president of Dorfman Investments in Boston,
is a columnist for Bloomberg News. The opinions expressed are his own.
His firm or its clients may own or trade investments discussed in this column.)
Boston, Aug. 15 (Bloomberg)
-- To invest successfully, one trap you have to avoid is what I call the ''oriental rug fallacy.''
Ads for oriental rugs perennially stress the percentage
markdown from the original list price.
This one is 50 percent off, that one is 70 percent off,
yet another is 80 percent off. What bargains!
What nonsense.
The value of a rug isn't determined by the percentage
markdown from an original price that may have been
ridiculously puffed up. It is determined by the quality of the rug,
and by what it costs compared with other rugs of
similar quality.
Same thing in the stock market. The mere fact that a stock
has been ''marked down'' from $100 to $50 a share doesn't
make it a bargain. What matters is whether the stock
presents a good value based on current and estimated
earnings, book value (corporate net worth) and the like.
Here are four stocks that I think represent genuine
bargains right now: BMC Software Inc., Computer Associates Inc.,
Novell Inc. and Conseco Inc.
I selected them by using Bloomberg stock screening software
to comb through some of this year's biggest losers
-- the stocks that have been ''marked down'' 50 percent or more.
Among the 1,467 U.S. stocks with a market value of
$1 billion or more,
there were 76 stocks that
were down that much.
Stock Screens
I don't believe there are anywhere near 76 genuine bargains
in this rug store, however. After I imposed a series of
not-very- demanding statistical tests
(price-earnings ratio less than 20,
price-book ratio of 3 or less,
price-sales ratio of 3 or less,
and long-term debt less than stockholders' equity),
fewer than a dozen candidates remained.
I sifted them down to the following four:
Conseco, based in Carmel, Indiana, may be the most
speculative of the lot.
Under Stephen C. Hilbert, who was CEO from 1988 until
April, Conseco acquired a long string of insurance
companies (many of them mediocre), using its high- flying
stock as currency. It then centralized many of the
companies' operations and cut costs to improve profits.
New CEO
Conseco's accounting was widely viewed as aggressive,
and Hilbert's compensation (he received more than
$13 million a year for three years running) as excessive.
The company also took on a fair amount of debt, which
recently amounted to 174 percent of stockholders' equity.
Now, thanks to one last acquisition that blew up in its
face -- Green Tree Finance Corp., for which the company
paid $6 billion -- Hilbert is out and a new management
team is in.
Gary Wendt, a respected finance man from
General Electric Co., is the new chief executive.
I think if anyone can turn Conseco around, Wendt is the guy.
I first wrote about Conseco in this column
in November 1997, when the stock was at $46.
''Personally, I've never liked Conseco,''
I wrote at the time. ''
It has always seemed to me that too much of its earnings
have come from financial engineering, that the companies it
keeps acquiring are often of dubious quality, and that
chief executive Stephen Hilbert's pay is excessive.''
Today, you can pick up shares of Conseco for $7.50 apiece,
down 84 percent from when I made those harsh remarks
33 months ago.
But if I hated the stock at $46, I like it at prices under $8.
(John Dorfman can be reached at jdorfman@bloomberg.net or
Dorfman Investments, 101 Federal Street, Suite 1900, Boston, Massachusetts 02110.) |
