Nothing new on the Bass front, but look at this article --
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Olstein mutual is true, hard-core value fund // Bargain hunter -
cushions potential downside with stocks that don't have as far to
fall
Austin American-Statesman
Sat, Jul 19 1997
Twenty years ago, Bob Olstein made his name on Wall Street as co-author of the Quality of
Earnings Report -- a newsletter that tore apart income statements and balance sheets to get
the real dope on a company's performance. Today he runs a mutual fund.
The Olstein Financial Alert Fund is a hard-core value fund. Really hard-core. Olstein uses
his principles to hunt bargains, and his motto is ``defense first.'' In recent weeks, he has
been buying such out-of-favor companies as Coachmen Industries Inc., a manufacturer of
recreational vehicles that's 38 percent below its high of last year, and Seagate Technology
Inc., the computer disk drive maker, which is off 34 percent.
For this period of stratospheric stock prices, Olstein's strategy may be exactly right.
Unappreciated companies have a shorter distance to fall in a correction or crash. And
academic research shows, in the words of John Campbell, professor of economics at
Harvard, that ``the average excess returns on value stocks -- stocks whose prices are low
relative to their book values, earnings or dividends -- are even higher than the average
excess returns on stocks in general.''
Lately, however, value investing has been a tough path to follow. Mutual funds that buy
growth stocks have been racing ahead, their managers profiting from ``momentum''
investing -- hitching a ride on a fast-moving train and then jumping off as it slows down.
This is an extremely risky business, but it has paid off.
Also, at these altitudes on the Dow Jones industrial average, it's just tough to find bargains,
so Olstein's fund has about one-fourth of its assets in cash. Still, he has managed to
produce a remarkable return of 34 percent over the past 12 months, compared with 42
percent for Vanguard Index 500, the popular fund that mimics the market, and 32 percent
for Fidelity Magellan, the huge growth fund.
I'm not necessarily touting Olstein's fund as an investment (though you should check out
his prospectus; call (800) 799-2113). What's more interesting is to look at what he's
buying and why.
Coachmen Industries
Take Coachmen. ``Here's a stock,'' he says, ``which has disappointed investors with
earnings that are below estimates. Those are a joke -- earnings estimates -- but they affect
the price of a stock. Anyway, it was knocked down from $28 to $15, so we started
buying.''
Coachmen trades at a price-to- earnings ratio of just 10, or about half the P/E of the average
stock. But Olstein uses a more sophisticated method of analysis. He decides, by probing
income statements, just what all of Coachmen would be worth to a single private buyer.
(He does the same with all the stocks he researches, including General Motors Corp.,
another favorite that he has been buying.)
``Our value for Coachmen,'' he says, ``is $27 a share. It's now $19, so we're buying. As
it begins to rise toward our value, we start selling.''
Airline stocks
That's exactly what he did a year ago with airline stocks. In his annual report of Aug. 31,
1996, he noted that ``the fund recently made a significant commitment to the airline
industry, in particular to Delta, Continental and United. ... In the last few weeks, airline
stock prices have declined due to increased fuel prices, security concerns and quarterly
earnings projections, all of which the Manager views as short-term negative
developments.''
He was right, and he rode United and Continental up to big gains, then sold them. He still
holds Delta (it's 3.2 percent of the portfolio, and he's buying more), which he thinks is
worth about $120 a share. It's now $84.
Olstein uses techniques you should not try at home. Trading -- jumping in and out of stocks
-- requires far more discipline than the average investor can muster. And placing a precise
``private market value'' on a stock is beyond the ability of most amateurs.
Other people's dislikes
Still, we can learn one important, general lesson from Olstein, the King of Value: Buy
stocks that other people hate. Here's the way he puts it in his semiannual report:
``Buying the pessimism that creates value is a lonely and contrary thing to do. Instead of
paying high prices for companies that are currently providing investors with immediate
excitement, publicity and gratification, the Manager is willing to go through long, dark
periods with individual securities which are out of fashion but are conservatively financed,
produce excess cash flow and represent good businesses selling at a discount.''
There's a second, more specific lesson here as well. Notice the phrase ``excess cash flow.''
That's a number you can derive -- roughly, anyway -- using a company's annual report or
10-K form filed with the Securities and Exchange Commission.
``You take the firm's earnings,'' says Olstein, ``and add back depreciation. Then from that
total, you subtract the company's capital expenses and its need for working capital. What's
left is excess cash flow.''
In concentrating on this figure, Olstein is in good company. Another fan of excess cash
flow -- or, as he puts it, ``owner earnings'' -- is Warren E. Buffett, America's
second-richest man (after Microsoft Corp.'s Bill Gates) and the chairman of Berkshire
Hathaway Inc., the successful company and buys huge chunks of other companies.
In a public corporation, says Olstein, excess cash flow goes to things that directly benefit
the shareholders: ``raising the dividend, buying back stock, buying other companies.''
Also, he says, the money provides an insurance policy. ``If you have this cash and
problems come up, you don't need to adopt short-term measures that aren't in your
long-term interest to get you through.'' Also, companies with excess cash flow tend to get
acquired by other companies at a premium.
Bowne & Co., the oldest and largest financial printer in the country, is a good example of a
firm with strong excess cash flow that was hit by bearish sentiment last year. ``We bought
it at $19 to $20 a share. It's now $31, but we think it's worth $37 or $38.'' It trades at a
P/E of 8.
He's also enthusiastic about GM, which is creating more and more cash flow by cutting
expenses. He pegs its private market value at $75 to $80 a share. It's now $56.
And then there's Seagate, an excellent company that suffered excess inventories and fell
short of analysts' earnings estimates. ``We don't care about the next two quarters,'' says
Olstein, who is willing to wait three to five years for value stocks to pay off. Seagate,
another firm that should be generating hefty excess cash flow, is now trading at $37 (and a
P/E of 14), an attractive price, says Olstein, who pegs its true value at $56 to $60. Seagate
now represents just 1.5 percent of the fund's portfolio, but, ``if it gets any cheaper, we'll
buy more.''
Intel and Sotheby's
Other large holdings include Intel Corp., the semiconductor maker; Sotheby's Holdings
Inc., the auction house; and two companies in addition to Coachmen that make recreational
vehicles and mobile homes: Fleetwood Enterprises Inc., and Champion Enterprises Inc.
Olstein believes these undervalued companies are selling products that aging baby boomers
will begin buying heavily in the next few years.
So why not simply buy Olstein's mutual fund? Go right ahead, but heed a couple of
warnings:
First, it has only been in business since September 1995 (though Olstein has managed
private accounts for two decades).
Second, it charges high expenses. Over the past year, the fund's expense ratio, according to
Morningstar Inc., was 2.43 percent -- or about twice that of the typical fund. In addition,
there's a separate fee of 2.5 percent if you sell in the first year (no fee for sales after year
two). Olstein is frank about the costs; he says you get what you pay for -- though investors
in index funds, which have rock-bottom expenses, would disagree.
Still, Olstein is selling a rare product in these go-go days. ``We're more interested in
steadiness than flashiness,'' he says. ``My investors are interested in not losing their
capital.''
Glassman writes weekly in the financial section of The Washington Post. He also writes a
column on economics and politics for the Post and is moderator of the ``Sunday Capital
Gang,'' a Cable News Network public affairs program.
(From the graph)
Olstein Financial Alert Fund
Though Bob Olstein has managed private funds for 20 years, his mutual fund has operated
only since September 1995. Recent fund performance has been good. Price per share:
Source: Bloomberg Business News
(Copyright 1997)
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