Wall Street Week With Fortune; 0102

Fire works on Wall Street as the Dow celebrates its best day all year soaring three hundred twenty five point Friday. I don't know who to get market advice from anymore. We have all the top stock pickers in all the land feeling like biotech stocks so D.O.A. don't count him out just yet. We may have the prescription that a whole lot more old Wall Street Week With fortune. All right my good fortune is made possible in the morning by going to gets an automated wired digitized push zero for more trans world. To help business make sense of it all. For professional services the answer is the people will do more than to. Add by contributions to your PBS station from viewers like you. Thank you.

I'm Jeff COLVIN And I'm Karen Gibbs welcome to Wall Street Week With fortune. The fireworks were all up in the sky this Fourth of July. The Dow blew the doors off Friday brightening everyone's mood at the end of a mostly dismal week. Another CEO got fired from a re messy at Vivendi. The Justice Department launched a criminal investigation of yet another telecom firm Quest communications. It's already investigating Global Crossing and WorldCom by the way WorldCom stock finally resumed trading and immediately fell to six cents a share. Karen you know baseball's all star game isn't til Tuesday but this evening we've got an all star team we've put up against any at least in the all American sport of stock picking their America's all star analysts identified by our colleagues at Fortune magazine. After combing through thousands of stock ratings from twenty nine hundred analysts these are the absolute best on Wall Street they're here to play ball and they'll tell us exactly who they like now. But first Karen who did Wall Street like this week.

Well Jeff what a difference a day makes. Whether it was a terror free Fourth of July or shortened Friday session the blue chips managed to put in a positive week. The Dow Jones Industrial Average having been hammered Monday and Tuesday found footing on Wednesday and roared back to life on Friday adding over three hundred twenty point four weekly gain of one hundred thirty six point to one and a half percent. That broad based rally lifted the S&P 500 index out of its most recent swoon. The S&P just shy of breakeven losing only a fraction for the week after falling below post-attack lows and the bloodied Nasdaq found relief not just from the semiconductors but by a techs came back to life as well. The NASDAQ adding over 68 points on Friday but still off by about 15 points for the week. Well Jeff Friday's explosive rally came on light volume can we read anything into that. Well that is one of the things we're going to talk with our next guest about who you might be wondering if you can ever trust a Wall Street analyst again. Certainly it won't be easy but many

people don't realize that a few Wall Street firms have avoided the conflicts of interest that make so much stock research suspect. One of the very best of these firms is Sanford C. Bernstein run by CEO Sallie Krawcheck who joins us now research plus asset management are all Bernstein does and all it has ever done. No investment banking nothing that might tempt its analysts to pull their punches. That's why some 5000 institutional clients pay millions to get Bernstein's advice every month. Sally glad you're here. Great to be here thank you. I want to start by asking you about what happened on Friday a day after a holiday short session normally that kind of day is a snore. Instead the Dow rises three hundred twenty five points what should we make of it. Well I feel like I'm supposed to tell you it's short covering or this relief rally or something like that. But I think what we really have to say here is it's you know it's always tough to try to read too much into any one day's trading and I would say particularly a summer Friday a shortened Friday July the 4th. All the bosses were at the beach. The weather has been

beautiful up and down the Eastern Seaboard nobody was at work today so I wouldn't read too much into it at all so this was the kids having some fun. The bosses are away and the kids are buying in the bosses who are selling way back on. You know could well be back next week. Got you. Well Sally Jeff and I have been tossing this question back and forth for a couple of days or maybe even a couple of weeks with all the attention being paid to analyst. Do they really play a viable role. Why should we have them. Well I think there is very much a role for analysts. There is more and more information and data coming at the investor today both the institutional investor and the retail investor. But you know because of that there is a real premium now that's being given to analysts who can pull the information together who can give a sense of what all of it means. You know that it's not just so many numbers coming at the investor so many reports coming at the investor. But how to really place this stuff into context and give the investor a feeling for you know where the market is is going I mean we've actually you can argue you know we've seen what you know in the bubble by having too many people

with their eye in the wrong places and not doing the type of research that we need. Where that can lead which is a pretty sorry place for all of us. What do you think about all the reforms being bandied about. Well you know I am of the view that you know sunlight is the best disinfectant So bringing in more sunlight on to what the analysts are doing and what the potential conflicts are is a very good thing. I think like everything you know is a pendulum swings it tends to swing too far one way and too far the other way. So some of these you know these reforms that are coming in are probably going too far in you know in the other direction. And I worry about ones particularly like these you know these things will have to do where will you know the analyst will have the stock charts of where the and the analysts will notate where they upgraded and downgrade a stock and you can see how instead of analysts looking then as stocks investments they begin to look at them as trades to try to become the best stock picker in any given week so some of these are going too far. They are costly. But you know on the whole this is this is change this well needed.

Well we know what happens when what did happen and can happen when one of these institutions that does have the potential conflicts makes a rating. Recommendation that a company doesn't like the CEO calls up and says OK forget about getting our next piece of underwriting business. Now you've said I know the CEO has called you up angrily when Sanford C. Bernstein issues a sell recommendation which you don't have these conflicts. What do they say to you. Well it's the same thing. You know you do have CEOs who call you up and scream at you rather than saying you're not going to get our business. They generally tell me how stupid our analysts are. And the more they tell you how stupid they are the more you say you know maybe we're on to something but make no mistake the pressures are there for analysts who don't have these you know conflicts now. It comes not only from companies you know shutting them down or saying they're stupid but also comes from investors themselves I've had more than many more than one phone call. You know when our analysts have put shorts on stocks for example who've said you know I don't like this call. You know I own this stock and this makes me angry so there are conflicts you know conflicts there. Analysts get pressure from

all sorts of different sides. Well exactly I mean ironically in a way the tough times for Sanford Bernstein were the great times for the markets when some of your analyst were saying quite properly these issues are way overpriced. Tell me about it. It was it was tough for us it was tough for us because we were negative at a time when everybody was in sort of a euphoric mood. It was also tough because at that time you know Walt Well research really never goes out of style independent research never goes out of style. It's sometimes more in or more out. And when the market goes up every day people are a little bit less concerned about hey what's the five year plan. And that really is our bread and butter. Back to separating some of these ideas here particularly the institutional research versus retail research. Will that put the little investor at a disadvantage particularly to big money. Well I think these changes are really being made for the retail investor a lot you know in many ways the institutional investor doesn't need these protections. You know they as I talk to our clients and I'm talking to them all the time now there's a. You're kidding. My goodness you know these

analysts were in pitches on deals they all know this. It's the retail investor who didn't know necessarily what was going on who you know we could. I read this in the paper and people are saying gee that the retail investor do they really think this stuff could could go on. These stocks could go up for forever. But you know I think we need to give them the benefit of the doubt that is their professional advisors the analysts and the financial advisors were advising them that gee this can't continue. You know they they were they were not getting the best advice in the situation. So Ali this is really valuable. We appreciate you being here. My pleasure thank you for having me here and I think that you spoke earlier with one of Sally's colleagues from Sanford C. Bernstein. Yes certainly did. Sanford C. Bernstein Research is not available to individual investors but tonight we bring you the fortune all stars number one technology analyst back when Qualcomm was the darling the dame's lot McAuliffe correctly advised his clients to get out figuring that to justify a price that high two thirds of the world's population would have to own a cell phone in 10 years. Wacom shares tumbled

75 percent from its peak as the tech sector crumble. Now that's the kind of track record that led his firm to also make him a chief strategist for their general market portfolio last year while the Nasdaq fell off the cliff. His tech picks returned 21 percent and for the first half of this year his value focused portfolio was flat while the S&P 500 is off more than 15 percent. Day Welcome thank you very much for joining us. My pleasure. Well in light of all the attention being paid to analysts now how do you address the issues of advising clients recommending research looks as well as portfolio picks. You focus on what's important. We only do research we get paid by our clients to provide opinion and nothing else really matters. So you tend to focus on what's critical which is quite normal for an analyst. And what is critical critical is to provide essentially unbiased well researched advice and will and both are very important. You basically have to have well reasoned opinion you know always going to be

right but you least being consistent understanding your assumptions being clear about your assumptions. I think that's well rewarded. Well you have some things that you're some stocks that you're kind of interested in and ready to buy. Let's talk about them. Why is that drugs this one why flaps. You're looking at Federated Liz Claiborne Union Pacific and votive. Interesting. OK let's talk about them one by one. Let's go to WHY IS THAT WHY it labs the pharmaceuticals are in the tremendous pressure the generics are capturing an increasing share of the market. There is going to be some pressure on drug prices. There's some economic sensitivity as consumers are required to pay more and more of the cost of the drugs. So you want to look at some of the companies that have a rich pipeline there is still have reasonable valuations and that could conceivably experience 15 to 20 percent growth over the next couple of years. I think Wyatt is one of the companies that could have that has a very strong pipeline. There are still some risks associated with

approval of new manufacturing facilities and that that should that must happen in order for the stock to work. But at least there is a rich pipeline there is strong demand for its products. It's one of the few areas where you could still buy growth at reasonably attractive valuations. Interesting Is there any difference now between growth and value. What's interesting is that's a great point you brought up. If you look at the valuation of the so-called growth universe and valuation of the value universe the two and now the two have essentially converged or. Achieved one of the lowest levels in history that is the growth stocks now trading at historically highs discount to where they have been because people do not believe anymore in growth they do not know where the growth is. All right let's move on to Federated home to my favorite Louise Mason and Stearns. Isn't that rather cyclical isn't it a kind of dependent on consumer spending. Karen you're absolutely right. But back to my first point. The consumer spending has been strong at the low end of the market. The sub $75000 household

and as a result companies like Wal-Mart calls and many many others have done very well. Federated on the other hand has done very poorly. It has had very slow growth last year and yet despite that slow growth it's been able to manage his business very well. And really the point of Federated is to the extent that economic recovery comes. The high income households which have thus far stayed away from spending because they've been hurt the most by the stock market must come back. So it's a true cyclical pilled play as you pointed out earlier and it's one of the stocks that is sufficiently attractively valued to buy it. And you wait until the consumer comes back which hopefully will be within the next 12 months and then you do make money. How about Liz Claiborne I mean that looks like that the apparel industry has been decimated by globalization. Yes. Why this picked up again. You mentioned you actually mentioned the reason we picked the stock. It has been decimated and also one of the things that has happened last year is kind of important. Retailers have dramatically reduced their

inventory levels so sales of some of the apparel vendors appliance vendors have been quite depressed last year. As we move through this year you have a lot of easier compares. And as you're looking at the customers of Liz Claiborne which have low levels of inventory there's not as much need for discounting. They have a very broad product line addressing multiple market segments and there is probably some opportunity there for SF with some modest margin expansion. The rail transports have seen a huge growth Union Pacific. Is it near the top. I don't think so and here's why. I wanted to find these in a cyclical area of the market which is liberty volume growth but not requiring inflation because pricing has been very bad across the economy and railroads essentially a moving things. They have a tremendous amount of fixed cost and even the little bit of a volume pickup translates into strong earnings growth in the order of 10 to 12 percent. So while it has had a move it is still very attractively valued at something like 12 times earnings and could see earnings growth in the low teens really quickly

let's talk about Vodafone before we go to some of the negative stocks. Why Vodafone. Probably the most controversial bet we have right now leader in almost every one of the one number one and number two in virtually every market. Very strong interest rate coverage relatively low amount of debt compared to its Peter peers. Clearly a survivor and very attractively valued so as the new wireless services come out they are a winner. If I do you have some stocks that are either under weighted or negatives let's look at them. Intel AT&T and Tyco Let's talk about them individually. OK Intel. The biggest issue for Intel is that it has been a leader. It is still priced as a leader yet its leadership role is deteriorating. It is no longer its end markets and no longer as attractive in its ability to grow in those and markets has been has been hurt so it will take time for them trying to transition to a new strategy.

How about AT&T is there anything that you're seeing there that we don't see in the reason that you sold it. A We sold it we have four portfolios and one of the portfolios from which I sold it was a purely quantitative portfolio and we sold it down from where we sold it. There is there is now turning to be good news with the accounting issues at WorldCom that's going to turn out to be a big positive for AT&T. Some of the corporate customers are going to start to shift to AT&T at this point. I would start looking more positively especially given what's happening to WorldCom. But Dave thank you again for joining us really appreciate your insight. My pleasure. All right. Such affidavit sees some value in opportunity and prize for beleaguered Ma Bell. Any lessons for the beaten up biotech. Well there are probably lessons for just about everything in that observation and it's true the biotechs actually had a big update today like almost everybody else. Hardly anyone doubts that the scientific advance affecting our lives most in the coming decade will be biotechnology. But plenty of people doubt investors can make any money from it. And indeed

those stocks are down 44 percent just this year. Here to offer hope are our all star biotech analyst Craig West and Alex Hill of A.G. Edwards joining us from company headquarters in St. Louis. This team ranked number one because they deliver in bad times as well as good. Last year when the average biotech analyst was down 9 percent. These two were up 33 percent. Craig and Alex thanks for being with us let me ask you to start with how you're doing so far this year it's a tough year. Don't think you have don't all the answer at once. It depends on how you measure it that we're we're down like the the entire index is. We've had a focus on gene therapy as a subsector And that's that's outperforms that's helping a little bit. But as valuations get down here to look attractive attractive to us for the first time ever we have some positive ratings on the large caps biotechs and even though those are down there actually those ratings are beating the index so there again that's helping

us also but. But you know you you can't fight a 50 percent down move in the BTK over the first six months of this year so we're right at hurting along the BTK being one of the big biotech indexes next BTK. Exactly and now of course a lot of investors are simply afraid of biotech they don't understand the science. They may not know the companies all that well. Alex why should. An ordinary individual investor think about these things today. Well I think one of the things that you really need to keep in mind here is what you lead to lead the U.S. out with which is that biotech is going to be one of the really big growth drivers for this whole century and understanding of how genes make life work is really revolutionary. And ultimately as an investor you are going to want to participate in that. We think that you can do that even if you aren't an expert in the science just by having a steady hand committing a portion of your portfolio to biotech and kind of sticking to that

asset allocation because you know when we look at these companies here they're not 40 percent worse than they were at the start of the year. What you've got here is a very emotional sector and I think that you can make a good long term return being in the sector and in the shorter term. Just by trading against the emotion of the sector you can do pretty well. Craig you mentioned a second ago the big names in this sector and I've heard you talk about them in the past as the ABC of biotech. Who are they what do you like them. Though the ABC did actually and that as a result of the ticker Sam did you know you were down a little on the do you as I recall. Yeah we just haven't upgraded. D We were more and more attracted to valuation down here but we're still a little bit reticent that you know in the ad here in St. Louis valuation is our first and foremost guide to these stocks. That's been the root reason that we've had a neutral rating on things like Amgen for the last two and a half years. So now being a Amgen being Ed who are big and see Biogen is B C is Kyra and again genetic which has the ticker d and e is d.

So we like Amgen largely because of the value which is stock is actually down about half from its a year 2000 high and part of the reason that we like it is really simply because of the valuation but there is also some near-term pipeline expected approvals coming in the form of a drug called Aaron asked for cancer and we're expecting also the merger with Immunex to go through when we have some pretty good growth expectations for the Immunex drug embroil which is really the reason that Amgen went after that transaction. Biogen on the other hand has recently seen some both some pretty good ups and some pretty good downs. It's receiving new competition for its its market leading a mass drug haven acts. And that's been the down on the upside it received a positive FDA panel review not an FDA a full FDA approval but an FDA panel review for its drug and movie which is a brand new psoriasis drug in a market that's rather

large and essentially and not served at all by any of the current medications out there. And then finally Kyra and when we think about the sector the engine of the bio the engine engine antic we think of as the premium name send and Biogen in Cairo and we think of as value names. And we've said Biogen was for the brave and that's for people who actually want to bet on an FDA event. And Kyron rather is for the cowards in that they don't have anything before the FDA the reason again for the interest of Kyron is again we always begin the valuation we're interested in the valuation of the stock. But they also have a new blood screening system called proclaim that was recently approved and they are busy converting that into into a full commercial entity. So the top line driver for Kyron is essential already in place and it's really for them to ship the product and collect the revenues. Guys you know with all that we have heard and read in the past few weeks about Martha Stewart I don't think any

investment advice has come out of it until now because you guys have something you're calling the Martha Stewart portfolio. What is that all about. Well that's just us being a little bit hawkish here but what happened was we were reading the stories about ImClone we don't actually cover the company and ImClone being the company she had invested in. That's right. And what we what we have noticed for some time is that the biological pathway that human clones drug acts on is actually one that a bunch of companies are exploring and two firms in our coverage. One is onyx and. The other is abject Knicks have drugs that act on that same biological pathway and they have market values that are competitive with the market value that you've got there in ImClone. So you could buy Onyx an app genic you could get the biological pathway in the cancer treatment and you get managements which

are at least last we heard still at large. So we like that that play. In other words she could have bought and sold those stocks all she likes she she could have done that with with with ease and probably saved herself a fair amount of market value. We only have a few seconds left but I want to ask you about one other thing because there's a whole sector of biotech that I think you guys like. Can you tell us very briefly what it is. The subsector that were were really keen on here is Gene therapy and we see tremendous value there this is a sector that's already been hit very hard and over the course of the next 12 to 18 months we think there will be some solid clinical news indicating that this will be a technology that works. And there are a number of companies that one could invest in and probably should invest in all of them. If you want to be in the sector. Yeah we absolutely recommend a portfolio play here. Gene therapy is nice and actually the Martha supra folio is a nice example author also of one of the things that we look for. We

are interested in technologies that are that are close to coming fruition and the idea here behind the coverage of gene therapy is that when we started to research the sector what we found were a couple of things first of all we found several companies with drugs in late stage clinical trials which actually for phase 3s or products in phase 3 which is not something we expected to find in gene therapy. And as you looked into those products in particular you found that I think there is. A decidedly good bet here that at least one or two of those will produce some some some pretty good clinical results and make the sector work. That's terrific Greg. Alex thank you so much for these views on biotech I feel better already. So you're out there I much thank you. Well we've heard a lot of stocks mentioned tonight but rest assured this won't be the last you'll be hearing about them. Jeff and I will report back to you about how they are performing and you can keep track of them as well as on our website PBS dot org. That's right Karen. We're even going to take it a step further creating our own Wall Street Week With Fortune

list of all star picks on a regular basis will tell you which stocks the top analysts and only the top analysts are upgrading and downgrading. But before we go let's take a quick look at what's coming up next week. We've assembled a group of market pros who not only think Wall Street's broke but they've got some ideas on how to fix it. Warning stars Don Philips and how it Charlotte the man who'll root out financial shenanigans on Wall Street. We'd like to hear from you our viewers so write us at Wall Street Week With Fortune Owings Mills Maryland 2 1 1 1 7. Have a great weekend. So you. Know. To learn more about this program visit PBS online at PBS dot org America Online keyword PBS for a transcript of this program send $5 to transcripts Wall Street Week With Fortune Maryland Public Television Owings Mills Maryland 2 1 1 1 7. Wall Street Week With fortune that was made possible in part by going to.

Markets may rise. Or they may fall. Who helps companies prepare for the unpredictable business advisory services. The answer is that people have to wait until. And by contributions to your PBS station from viewers like you. Thank you. This is PBS.