Watch the Wiggle Room
One of the portfolio managers who has long hacked through the tall grass of
cash-flow statements and financial footnotes is hunting the very biggest game in
the stock market.
Robert Olstein of Olstein Financial Alert fund -- who was imposing sharp
scrutiny on corporate balance sheets long before it became voguish, in the light
of Enron's bonfire of vanities -- is telling shareholders that his accounting
acumen has led him to sell short General Electric's shares.
In his recent quarterly missive to investors, Olstein relates that he took a careful
look beneath the smooth upward slope of GE's reported earnings and found the
underlying profit-generation less than impressive.
Mind you, Olstein is alleging nothing nefarious at work, and in fact he applauds
the company's recent move to a somewhat more detailed financial-disclosure
policy. He simply believes GE is availing itself of whatever wiggle room the
accounting rules allow it, in order to meet its aggressive promises of earnings
growth.
Olstein writes that he dug into GE's books to "assess what we believed was
GE's basic recurring cash flow in order to value the company. We analyzed the
sources and components of GE's earnings power, and we concluded that
General Electric's reported earnings contained about 30 cents a share of what
we believed were lower quality-of-earnings sources."
He figures that the lower tally of high-quality earnings means GE shares are
properly worth 22 to 25, compared with their recent range in the low-30s.
Looking to seize on this perceived overvaluation, he says he has taken "a small
short position in GE" for his $1.5 billion fund.
Olstein's bet against GE comes as the company already has lost some of
investors' once-fervid faith in its unending, fast profit expansion, knocking the
stock down from a high of more than 53.
Some fund managers showed renewed excitement toward the stock last week,
bidding it up 7% Wednesday as CEO Jeffrey Immelt reaffirmed his forecast of
18% earnings growth this year.
As for that projection, Olstein says, "We not only have our doubts that GE is
capable of such rapid growth, but we believe that the cyclical growth company
is running out of accounting options."
If he's right, then only an accelerating economic recovery might be able to keep
GE from disappointing the market.
ragingbull.lycos.com
Tech Spending may remain flat till late 2003
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