Wall Street Week With Fortune

A. A. A. A. A Coming up on Wall Street Week With four bold creative brilliant. Just a few of the words used to describe some of the successful corporate strategies being deployed today from the remarkable turnaround at McDonald's to who's driving the smartest company in the world. Jeff Gold looks at what's working in the business world and what can investors learn about stock picking from the leading do it yourself brokerage firm. Gehring givens on why the pros it's rough are thinking big. Welcome to Wall Street Week With

fortune. Wall Street with good fortune is made possible in part by Nuveen investment. Now you can learn everything you need to know about exchange traded funds. Comforting isn't it. ETF connect an educational website of Nuveen investments. He's promised to support Wall Street Week With fortune. Welcome to Wall Street Week With fortune. I'm Karen Gibbs. And I'm Jeff called When can you find anybody in business today who is actually brilliant. The answer obviously is yes. The latest scandal trial headlines may suggest most business people are crooks or dopes or both. But those stories have obscured some stunning successes. Ingenious companies products

advertising and more that reveal who's winning now and who may be winning next. Todd Lapin is a senior editor of Business 2.0 magazine which has been tracking the biggest business winners. He joins us from San Francisco. David Kirkpatrick is one of my Fortune magazine colleagues just back from the World Economic Forum in Davos Switzerland. Todd let's start with the big winner right off the top. Who do you guys say is the smartest company of the year. Well we think that Toyota is the company that really is the smartest company of the year. It's been a very difficult time for American automakers are having a tough time selling enough cars at a profit to make it worth their while without discounts but Toyota is doing a great job of that. And the numbers tell the story. Toyota's market capitalization is greater than the American big three combined. It's a company that's doing very very well in a very tough business. It's an incredible thing and you you mentioned this but it is worth more than General Motors and Ford and AMR Chrysler all put together I gather that it won't

be long before it surpasses Chrysler as the number three automaker in America too. Well actually it could. The They're on target to soon pass General Motors as the biggest automaker in the world. It's a company that's just doing very very well. Very shrewd stick to its knitting and really knows how to get its cars out and in a way that again maintains profitability very difficult thing to do. It is difficult incredible story. Now you also identified something on a very different scale which was the smartest coolest cleverest advertising of the year it was a total of. Well we thought that the most interesting advertising campaign of the year was the pairing of U2 and Apple on the iPod. It just worked really really well. U2 of course was a band which everybody is wondering are they still relevant by pairing with iPod they made it immediately clear that they were relevant. And for Apple it worked out very well U2 as they are kind of a band sort of an upstart band with a very strong counterculture on method. And the pairing worked really really well and you could see that in the sales numbers for both both of the products you toos album went to number one in the

charts and the iPod had a fantastic Christmas. The iPod has been beyond belief as a phenomenon and David as a guy who follows this industry meaning the technology industry in general you have a pretty good handle this. Do you think Steve Jobs CEO of Apple is one of the smartest people in business. I just think there's no question he is the smartest person in business and I think he is the iconic business man of our age really. He's a visionary. He comes out with products that people want He's a brilliant marketer He's a brilliant he is himself is a brilliant product designer because he gets deeply involved in the details of everything Apple does he's an unbelievable control freak I'm not sure I'd want to work for him but he makes the technology industry amazingly interesting and we haven't said a thing about his role at Pixar which is another I was about to say that's one thing that I don't have failures of Pixar and other interesting things. What we could say about Pixar you're out there with them. Yeah it's just again Pixar. We always forget that he has a hand in that but that is an amazing company I mean they have not had anything even

approximating a flop yet. They have the Midas touch when it comes to making animated films and you can see that in the way that their bit what they have been doing is changing the field of animation and all of Hollywood for a really unexpected story I like what you guys picked as the turnaround of the year but was well McDonald's was our turnaround of the year and that was a big surprise you know it wasn't all that long ago that we were hearing you know gloom and doom stories about McDonald's fast food nation which really just pounded them the book and then there was Supersize Me the movie which just further pounded them. This looked like a company that was getting beaten down month after month. It's true when basically the core substance that basically you can eat fast food and not really have to worry about too much or being challenge very very bad publicity. What McDonald's did that was very smart was they they regrouped. They focused on their core customer which it turns out is the mother with kids. They made sure there were menu offerings that would appeal to them salads and chicken sandwiches. And they the idea was to get mom in the store so then they could

make the real money selling selling Happy Meals to kids. And it's worked out very very well for them. It has worked after a long time of really not working very well. You identified the smartest entrepreneur and there are a lot of people I think who still don't know this guy. They don't know his name and they don't know his record which is believe yet Jeffrey Citronelle avantage has really done an amazing thing in building basically a business out of nothing. Vonage is a company that sells voice over IP services which is basically making telephone calls voice calls over an Internet backbone. And that's turned out to be a great business. Because the costs are very very low and it's the kind of thing that you can really see it ripples of it taking place resonating throughout the telecommunications industry including in things like the SBC AT&T merger which we saw. It's a very very disruptive technology and he's really been a pioneer in making it a reality for consumers. Well and David this is what I want to ask you about because you follow that industry very very

well closely and this merger in which AT&T is going to get bought the last vestige the thing that was called AT&T is going to disappear or at least is going to be swallowed up inside a bigger company. How historic a development is that. Well it's a hugely historic development this was the great American corporation. You know AT&T and General Motors which is another company not doing quite as well as we as we used to think it would and we just heard a little bit about that. Those two companies were the companies. Now Andy is 80s going away and being bought by one of its former parts. How ironic. But AT&T was the company that created the whole telephone system of this country. But I think they're going away after an unprecedented series of stupid business decisions and in some sense I hate to say it but they deserve it. Well this is what I want to ask you about because there are people who argue that their demise was fated that it was nothing they could do about it. That technological advances of the kind that Todd was telling us about were going to do long distance business and it was only a

matter of managing the decline. You think they screwed it up. Well I think frankly getting rid of the wireless division was a big mistake. Yes I think frankly I doubt if it would possibly have been worse for them if they had held on to the cable properties which they sold they sold I also think you know buying NCR a real big mistake that they undid it later and it was a huge management distraction. Honestly I think Bob Allen and Mike Armstrong both are going to go down in history as sadly not the greatest of leaders. You have just been in Davos the World Economic Forum this huge conclave occurs every year attended by heads of state the biggest CEO is in the world. What was the big theme. There is always a big theme at Davos what was it this year. Well this year it wasn't hard to discern although it wasn't what you might think of as exactly a business theme. It was poverty. It was the recognition that global poverty was the biggest problem even for those who are not poor in the developed

countries. And this was set off by big speeches that Schroeder of Germany and Tony Blair of Great Britain gave early on in the form each of them making major commitments to working to alleviate poverty particularly in Africa. And then it was picked up throughout a number of other sessions in the form including some that I moderated on technology where technology companies are increasingly thinking of ways to get their products into the developing world as a way both to build their own sales. And at the same time really help those people. And this is one of the largest I think one of the largest ideas in business anywhere right now which is the idea that there is a lot of money to be made. Selling products to the 5 billion people around the world who we have always thought didn't have enough money to buy anything. Was there a lot of talk about that. Well there was and of course we've got to give credit to C.K. for Halata it was so there was no one who's a great business thinker and has written this extremely influential book that's out now called the fortune at the bottom of the pyramid he was all over Davos. And that the theory is that companies have never

seen such a big market as now exists in the poor of the world that they've been selling the same things over and over to the same half billion or billion or so of us rich people and now is the time to think of broadening that to the biggest market that ever existed. Now the problem is those people don't have money which is why my technology companies that I follow are especially excited about this because technology uniquely is a kind of business where the product you give someone can help them improve their productivity so they can pay for it. In other words it could enable them to make enough money. To buy more you had to become less poor at the same time they can afford to pay rates B or an EMT or one of the other companies that's working hard on the problem but you've got to get them started somehow. And so I gather are there companies giving away products to sort of jump start the process. Well there's certainly a lot of philanthropy around this issue of technology in the developing world and a ton of stuff happening although you know we've heard for years about Grameen phone where one cell phone in a village can make all the difference and people are starting to do the same thing with PCs. So yes I mean it's a it's a very complex hybrid of philanthropy and and profit

oriented activities a company like Microsoft for example which is just absolutely obsessed with this market is doing both and a lot of stuff with philanthropy and education in the developing world in countries like Gabaon and Namibia and at the same time repositioning the way they price their operating system and their applications so that they can be affordable for these people and by the way keep out that nasty open source stuff that's giving Microsoft a real run for its money you know another silly operating system that is that is free Todd you're there in the center of America's Infotech industry is a hot topic. Well it is the one thing that's becoming clear is that there are opportunities. You know there's a tendency to think well how can we possibly compete with Chinese firms or some of these South Korean firms but it turns out that both in China and in countries like India there is a demand for value. I think there is a recognition that that you do get what you pay for and in some of these developing markets among those who are willing to buy the technology they're not necessarily always looking for the cheapest. It has to be affordable. But they are doing a sort of a cost comparison where they're willing to pay a little

bit more if they have a greater perception of value greater quality greater performance so on and so forth. Those are where the opportunities are for American firms that's for sure. And the smart ones are starting to move in on that. Todd one of the most popular regular features in Business 2.0 magazine is your annual compilation of the hundred and one dumbest moments in business. It's just out and they are really dumb. What was the dumbest moment in business of 2004. The dumbest moment in business turned out to be the Kryptonite lock company which is of course a famous maker of bike locks introduced a product that is unbreakable right I mean these are the brakes slow breakable blocks you keep the best you can get. Well it turns out that you could break this lock and all you needed to do it was a regular ballpoint pen. You would just stick the pan inside the lock the lock. Hole and the lock would open which is bad. But what made it even worse was that there was there was a demonstration of this just to prove that it works. When

somebody made a short video of on the Internet which then began to circulate. So not only was it just bad it was became a public relations disaster and the company was forced to recall the locks and reintroduce the product. Not good. Leave it or not I think that David has an observational Well with all due respect to something I wrote about in Fortune very recently in our cover on blogging because the logs were so salient to the whole chain of events through and having spent a lot of time talking to the company I don't really think it's fair to call it the dumbest moment in business myself because in reality they didn't know this. Nobody knew it the thieves figured it out yet they couldn't help the fact that the Internet is now a whole new medium for dissemination for this kind of information so. My my feeling is they were caught in a valise not of their own making and their product which has been the defining product of that industry for decades has been you know assaulted however they made a very smart move I think which is that they decided to replace any lock of that type that you shaped lock that has ever been sold

going back to the 70s so I would say that was a very smart move likely their own by younger Saul rand which is a big company that gives them the deep pockets that they can afford although in Todd's defense I would say that in 30 years of making the product they might have figured out before now that you could open it with a Big Ben but perhaps not short out that you are a connoisseur of dullness what else was your favorites in the dumbest moments this year. There are so many good ones. My favorite all around was. To go back to AT&T AT&T was fined $400000 this year by the U.S. government for basically making an authorized telemarketing calls to customers which was again that's bad. But what was really bad was that 18th he was also administering a 3.5 million dollar federal government contract to administer the Do Not Call list. So this was the same company that matches the list of people who they were supposed to call which was then fined for unauthorized telemarketing. Again that's just that's classic dumbness and I don't think there's any two ways to tell that story.

You know that's hard to believe is not. That's classic it is tough to beat anything else that appealed to you in the list. There's just so many. I mean the other great story of the year was the chairman of Smith and Wesson who was found to have a history of armed robberies and was forced to step down during his youthful indiscretion phase. You know again it's great to know that you believe in your product and are willing to use the product. But this is not the kind of thing that is going to make any any board of directors happy you know. And he was forced to step down. He didn't have to leave it as you guys said in the magazine this was a guy who literally stood behind his product to figure in his career well you can't make this stuff up as they say. Todd Lapin David Kirkpatrick thank you. There's an old market saying as January goes so goes the year. Well January was pretty ugly for the markets with the Dow losing almost three percent. But February is off to a good start. The Dow gained two hundred eighty nine

points after the latest data show weak job growth. The Nasdaq picked up nearly 51 and the S&P added more than 31. So you could say the January selloff offered you a good buying opportunity. But how do you know which stocks to buy. You could follow the herd and buy great companies or you could do what the brokerage firm with the best stock picking record over the past three years does buck the trend and buy strong stocks. Greg Forsyth director of Schwab equity model development team joins us to share his strategy. Well Greg what do you do it Charles Schwab that others aren't doing. We take a strikingly different research approach than that of the traditional Wall Street firms. What is that different research approach. While I believe that it starts with a focus on the stock what we see with a lot of traditional analysts is that they seem to be focusing on the company. Their implicit assumption seems to be that if I find a great company find a great stock. But we

found that that is not really very effective because greatness is no secret. So those companies tend to be fairly valued actually have high and above average multiples. But maybe more importantly they're set up for disappointment. And when that disappointment comes in the growth doesn't come in as expected. Those great companies turn out to be bad stocks. So a great stock by contrast is one that is undervalued. OK. But if a stock stays undervalued that doesn't do the investor much good so there has to be a mechanism by which that undervalued stock comes back to fair value. And we believe that mechanism is to concentrate on the expectations they're embedded in any stock price. So what we're doing is we're looking for companies that have modest expectations and certain financial characteristics that we believe. Serve as a precursor to performance that exceeds those expectations. Well let's take a look at some of four stocks that you have on your portfolio list. One of the great stocks yours ExxonMobil. You also have MetLife Electronic

Data Systems or gas and Textron. Now what makes these great stocks. Well they share some common attributes So first of all notice that none of them are expected to grow 33 percent a year like an e-Bay for example. So they all start from modest expectations. But again what we're looking for is their ability to opera form those expectations. So some of the tributes that they have are strong and rising free cash flow also improving investor sentiment. And one way we can kind of see that this this surprisingly good performance out of their fundamentals is that all four of these companies have exceeded analyst expectations in terms of the reported earnings for each of the last four quarters. So that's something we look for as a confirmation that these companies are doing better than what people really are counting on. But with crude oil trading at almost 50 bucks a barrel ExxonMobil seems like almost a no brainer my right. Well you know the other common attribute that they share is controversy. I mean really all of these are

contrarian choices. And if you take Exxon for example of course some people think it might be a no brainer with oil prices going up but yet they might say hey you know I'd like to have a more leveraged play on oil. Of course there's the other side that's all those people that think that oil prices are due for a fall and though they would not want to hold Exxon or any other energy stocks for all of these have something that's maybe a little bit tainting them in some way or other. And again I think that's what leads to better valuations that we can pick up on what basic materials are getting some serious investor interest for those that want to get a little bit better performance out of their portfolio. So why does Dow Chemical make your cut while Engelhardt corporation does it with gold at four hundred twenty dollars an ounce. Well basically you know both of these are pretty good ppl you know commodity chemical type of plays. But then you have to look at the actual performance and what they're showing. Earnings are going nowhere. They're basically flat and in an environment that we would think would be favorable to

that kind of company. By contrast Dow is turning in excellent earnings performance. So that's what we're really kicking in and why we preferred Dow over Ingle hard. Do you have any great companies that are not great stock purchases. Will I mention e-bay earlier as maybe an example that most people are familiar with. I mean we all know that that company is great at least by the definition of it's been a you know a great grower in the past you know a leader in its in its segment. But why we think it's not a great stock. We actually just got a chance to see that you know they reported their recent earnings which are really very very strong but slightly below those inflated expectations I was talking about. And the stock got absolutely hammered. So these great companies like E-Bay that's what makes them tough. They have so much expectation built into their stock price that there's no room for error. Another company I like that is Southwest Airlines and we all know how the airline industry is struggling and Southwest seems to be like the one that we can count on surviving yet. What's

interesting is now the company is making positive earnings which is notable but they're not really going anywhere very very fast. Yet investors are pricing this company at 30 to 40 times earnings using the approach embedded in Schwab equity ratings. You know we wouldn't pay that kind of multiple for any stock much less an airline. Quick I keep hearing you mention expectations that Wall Street lives on that it's not what you did last quarter it's what are you going to do for me next quarter. You seem to say no don't think about expectations. Well what we want to do is don't automatically think that you know high growth is good. Every company has some level of expectations built into the stock price that it kind of serves as your benchmark and whether those expectations are high average or low. What you want to do is look for companies that have the fundamental strength that would lead us to believe that they can outperform those expectations when expectations are exceeded those expectations rise and stock prices tend to rise in concert.

Are you seeing any other trends coming up in your portfolio for 2005. The approach that we use our equity ratings are very you know evenly distributed across the growth and value spectrum across the capitalization spectrum. But interestingly right now we're seeing more large cap stocks in our 8 rated S. than we have in years. And while equity ratings aren't really designed to make you know market style calls what that's kind of telling us though is from the bottom up point of view the large cap stocks seem to be where the value is. Maybe that's due to the four year plus run up of small caps but we find that to be an interesting pattern and why you know I might guide people toward toward investing in large caps this year. Does that mean investors should sell their small cap stocks. Well again you know my specialty is really trying to figure out you know which stocks have the real good investment characteristics so in general at Schwab we have a viewpoint and we're fairly neutral right now and capitalisation that we may begin

shifting more toward large caps so no don't go out and just sell your small caps because we are seeing this interesting predominance of large caps in the A's. But what we would be saying is really really concentrate on each company's financial characteristics and if you see any deterioration in the fundamentals that the valuation levels a lot of these small caps are selling again there's not a lot of room for error. Greg Forsyth Thanks for joining us. A huge influence on the price of any stock for better or worse is a takeover. The merger fever is a pall in corporate America and suddenly mega deals are getting announced every few days. Procter and Gamble divide Gillette SBC to buy AT&T MetLife to buy a big chunk of travelers with much more on the way for investors like you and me that means one thing above all. Watch your wallet. Big deals are usually bad news for the buyers. Not always just usually in the 10 biggest takeovers of all time the stock of the buyer went

down after the deal. In seven cases that doesn't mean you should try to play these stocks like a violin after a deal becomes public. By then it's too late says Judith Cowen editor of mergers and acquisitions report. When a mega deal is announced it is no longer the average investor who's in the stock. The acquire stock and the target stock. It is the hedge fund. It's too difficult for an individual to assess the arbitrage risk. Therefore the average investor should enjoy the ride if you will just enjoy the view and take a step back. But before that happens you can do your homework. If you own a company that is making noises about looking for targets proceed with caution. Especially in this deal Mad Season merger mania might be the theme song on Wall Street this season but it's certainly not the only music being heard next week. We'll tune into the future of radio. Satellite radio is the new darling of Wall Street. So join us for the battle of the bands. That's our program so

long. We'll see you next week. To learn more about this program visit PBS dot org and. For a transcript of this program send $5 through transcript Wall Street Week With fortune. Maryland Public Television Owings Mills Maryland 2 1 1 1 7. 0. Investor Education segment supported in part by NASB Investor Education Foundation. Wall Street Week With fortune was made possible in part by Nuveen investments. Now you can learn everything you need to know about exchange traded funds. Comforting. As an. ETF connect an educational website of Nuveen investments. He's promised to support Wall Street Week With fortune and.

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