Wall Street Week With Fortune

Investors throw in the towel after some better known companies deliver up a rocket body above Washington policymakers are falling all over themselves trying to write tough new pro investor legislation. But will they do more harm than good. And we've got a couple of money managers who actually see some big buying opportunities out there. Right now to stay with us we'll get inside all those stories and more on Wall Street Week With fortune. Along with fortune is made possible in part by deploying to. Today's network. It. Is no business response when forgiving logs on. For e-business services. The answer is the people of the lawyer too. And by contributions to your PBS station from viewers like you.

Thank you. I'm Jeff Baldwin and I'm Karen Gibbs welcome to Wall Street Week With Fortune another deeply down week in the market. And while no big new corporate scandals came to light the old ones kept dragging down stocks. Alan Greenspan tried to back us up by saying the economy is in good shape. But that's not what everyone remembers for supposedly doll guy he can be amazingly quotable and infectious greed was definitely the quote of the week. Greenspan's description of what cost all the scandals those scandals Plus the market's poor performance may at last be getting to individual investors. They don't lose faith easily but it may finally be happening. Last month they pulled money out of equity mutual funds for the first time in ages. The outflows then got much bigger this past week over 11 billion dollars. In addition small investors have recently moved heavily into selling stocks short strategy usually reserved for sophisticated big investors. Is that bad news. Well not necessarily if you believe the old wall

street stall that small investors buy at the top. Then maybe just maybe all this selling is a sign of a bottom. And if you've been looking for inspiration lately here's a reminder that you can always make money in a down market. Since the Dow first hit 10000 in March of 1999 the best performing stock has been 3M up 53 percent. The worst performer by the way was AT&T down 77 percent. So is it exhaustion or outright capitulation. And a week that actually included some positive earnings reports. Nothing could save this market from tanking. The Dow taking a huge hit losing almost 400 points on Friday thanks mostly to news of a criminal investigation into one of Johnson and Johnson's factories that manufactures and anemia drug. The Dow off now over 1000 points just since July 4th losing six hundred sixty five points this week alone as large cap value stocks bore the brunt of the sell off that drug sector weakness hurting the S&P 500 as

well despite Pfizer supplanted by pharmacy or for 60 big ones. A shake up at the world's largest media concern AOL Time Warner amid falling share price was of no help. The S&P closing at five year lows and losing 8 percent for the week. And the Nasdaq hurt by Intel's Mis and Microsoft's gloomy outlook is now at its lowest level since May of 1997 and has many asking when will the selling stop. So is the light at the end of the tunnel just an oncoming train. Tonight's roundtable doesn't think so. Actually seeing alternative opportunities in this falling market in everything from small caps to large caps. Bob Turner chairman and chief investment officer of Turner Investment Partners has large cap growth fund lost twenty three and a half percent in 2001 and is down over 32 percent year to date. But despite his losing record he has eight billion dollars under management and more money comes in every day. Are his clients on to something or just on something. We'll ask him. Also joining us is Michael Bachman.

He's manager of the William Blair Small Cap Growth Fund. Morning Stars Don Philips praise this growth fund last week as an up and comer for 2001 his fund returned 26 percent so far this year has lost nearly 19 percent. However his peers are off 90 percent. Gentlemen welcome to you both. But you both seem to be swimming upstream here. What is it that you're seeing that the rest of us are missing. We really see the economy improving. Alternately our earnings will improve and stock prices are at historic low valuations we think that's a nice combination to see stock prices move higher over the next several months. Usually stocks are under a leading indicator and they certainly haven't picked up that we've got tame inflation a recovering manufacturing sector. What's the disconnect. Certainly the headline shock. You know I think investors time horizon is really focused on who's going to be in the paper tomorrow morning. Once investors get past that concern which I think they will as we move through the summer the CEO

is have to attest to the validity of their financial results. And at that point confidence will increase and people will begin to focus on what should move stocks higher which ultimately is better earnings. Mike do you believe in that. I do care and under normal circumstances with interest rates at a 40 year low and an economic recovery on the horizon we would expect stocks to have been higher at this point in the cycle. But given all of the the issues that are out there that Bob has just alluded to I think that investors have a lot of concerns and they're voting with their dollars right now. And generally when they vote with their dollar smallcaps get hurt first and the worst. Why even think of small caps in this environment. Well you're right small cap stocks do tend to get hurt the worst when investors are concerned however usually any time we've had an economic recovery small cap stocks have usually led the way out and when we're talking about small cap stocks we're talking about small cap growth stocks tend to lead the way. Over the last few years small cap value stocks which have been the most beaten down during the big run up we had in the the Internet bubble they have

actually been quite strong. Well we're starting to see them give up some ground and I think that small cap growth said the wind in its face for the last few years expected to be at our back sometime in the not too distant future. Well let's start talking about some of the names you have I know Sinclair Broadcasting is one of your favorite stocks in fact one of your best performers have to tell me about that. You know we we really thought that the broadcast and media space would be one that would be a good performer as we start to move into an economic recovery. As you know a lot of the media stocks have been beaten down horribly over the last several years. So we decided to make a bet and bought several of the broadcast media stocks and Sinclair was one of the ones in our package and we still feel very good because we start to see advertising and media spending starting to come back and those stocks will benefit. You know suppose you had taken Sinclair out what would your performance have been. You know it's a good question I don't know for sure hard. We'll get back to you on that one. But you're heavily invested in tech stocks at least the fund that we'd like to cover this large cap fund. Why in technology put it off 73 percent so far from the high.

We think that presents a buying opportunity. Interestingly over the last couple weeks with the Dow has really suffered the Nasdaq is actually for the first time in a long time that a better relative performer led by some of the tech stocks and you know with the tech stocks we really are seeing an improvement in the fundamentals and earnings are not jumping off the page but certainly their improved improving marginally. Investors I think need to realize that tech stocks are cyclical that's why they went down a lot as the economy improves. They're going to be cyclical the other way and we believe go up in price. Small follows for those that got in at the top. And I'm probably guilty of that. You were a big big names Microsoft Cisco Microsoft of course putting out a very gloomy guidance this week and certainly got punished for sure. What's going to happen there. You know Microsoft I think has never put out anything except gloomy guidance that's very much a pattern. But when you really look at the earnings they were quite good. Deferred to beat the Street. Yes that's correct and they projected 50 percent earnings growth for next

year I don't think there are a lot of companies that are projecting 15 percent earnings growth for next year. The deferred revenue line went up by 38 percent year over year and you know now the company which at one point had been very highly valued is valued at a multiple just modestly above the S&P 500 even though its growth rate projected is double that of the S&P 500. They're still dependent on software. PC demand hasn't been anywhere near what they want. No it hasn't but we're just looking for a modest pick up in PCs I think that's what they highlighted. We do like very much the new areas that are involved certainly the consumer with M-S and the X-Box. And then there are Dot Net strategy in terms of software to the enterprise those areas are still small but they're growing quite rapidly. Mike you've got some names here that nobody covers nobody seems to care about and kind of a liquid if I could say so in the market. Talk about vital works is one of your stocks vital works is X is actually is a terrific little company. We first got into this stock in early 2000

and this was a split off of another publicly traded company that split into two pieces. Why did you get into it. Well we got into it because our the the sell side of our firm at William Blair actually covered the predecessor company. And when they split into the two companies most people got excited about the other one which was called Practice works dental practice management software. We looked at the other company vital works which is the piece nobody cared about yet they were the third largest physician practice management software company in the country. Eighty five thousand doctors were using their systems and they just brought in new management that really was was convinced that they were going to turn this company around and after meeting with them we felt the same. Let's talk about big caps versus small caps I know Bob is that the bigger is better and you. You seem to have carved out the small cap. Why. Well why first of all I'm a small cap manager so by definition that's all I can buy. But I think Bob and I do agree though that whether it's big or small that growth it's finally gross turn to to lead the way I mean we've both been getting punished by the value stocks over the last few years having their day in the sun. And I think after having a headwind over the last few years I think we're going to get

it our back. But I do believe that small cap stocks will lead the way as we go into what when investors perceive that we have an economic recovery. So I think big cap stocks have a place in the portfolio for sure but so do small cap stocks. The bigger they come the harder they fall. And we've seen that in particularly with the Dow the large caps have really lost quite a bit although they weren't necessarily the growth the growth probably better insulated in this way. Does it mean that we're going to see a turn around or just stop the decline. Say someone of the stopping of the declines. You know Microsoft has hovered around $50 a share Cisco's hovered around fourteen fifteen dollars a share Gee it's been in the high 20s and there's some stabilization around that you know. Indeed the bigger our better we believe that the you know the competition that existed a couple years ago for some of these bigger companies when the IPO market was hot and capital was flowing into all of these smaller companies has all dried up. So as a result the bigger companies are even better positioned relative to the others in the marketplace at this point.

Well you've been looking at some of the big companies and one of the one of the largest in the Dow General Electric now it's under this cloud are caught up in the the cloud the accounting scandals. How do you justify buying General Electric. None of us can predict perfectly whether there is an accounting issue I would say that. Keep in mind that the year and the companies you know really went through the income statement about very thoroughly to present their financial results. They've done it two quarter cents. They've got to attest to the validity of those numbers. On August 14th and you know our viewpoint is maybe we don't know fully until our goddess 14th that there could be issues after that but we've gone so far down the road with these accounting issues and our viewpoint is that you know the violators have been identified and those that are doing things correctly they're not going to get a nice pat on the back from the FCC saying good job it'll just come about that they continue to go on their way without any action being taken.

Mike you're also in a company called the insight into prizes that took a real big hit this week. Is it because of the illiquidity of the small caps or what do you think the biggest. The danger of facing small caps is right now. Well the biggest danger facing small caps I think is the very issue you point out is the illiquidity of these these positions and when the big funds want to get out of the name they can they can punish these things on mercifully as I was mentioning to Bob when we came in. When you're a large cash manager your company misses earnings by a penny or two maybe the stock used to be down a buck or two. We had a company miss earnings by a penny or two we'd wake up in the morning the stock would be down 50 percent and that's a scary thought but it also can work on the reverse when all of a sudden things are going well these stocks can go through the roof when investors get excited. All right Mike thank you very much. Bob Turner It's a pleasure from both of you to join us tonight. Well if what Jeff talks with shareholder activist Ralph Whitworth about why he thinks the new corporate governance rules won't have much impact in the boardroom. We want to answer some of your viewer male this question from Jim church in Porterville California.

He writes Can you give me the names of any funds that reflect the same portfolio as the Russell 2000. Jeff it's all yours. Well Karen there are actually many such funds that reflect that particular index here of three of them. By the way the Russell 2000 is down 23 percent year to date. That's the kind of performance we've had so far the Vanguard small cap index from Vanguard the leader in index funds there's also an E-Trade Russell 2000 Index the Merrill Lynch small cap index also mirrors the Russell 2000. There are many others as well. We do love to hear from you please send us your questions and comments at Wall Street Week With Fortune Owings Mills Maryland 2 1 1 1 7. Or email us WSW at PBS dot org. Now plenty of people who invested in Enron Worldcom Tyco Global Crossing among other companies are wishing now that Ralph Whitworth had invested in them too. Ralph runs a 1.7 billion dollar fund called relational

investors and its style is a little unusual and highly successful. He looks for companies with troubled management. Then he buys a three to 10 percent stake big stake often gets himself on the board of directors and tries to turn the place around. He has done it at several troubled companies. He's on now on the board of Mattel and waste management among others Ralph and shareholder activism go way back in the 80s he worked with corporate raider T Boone Pickens scaring the daylights out of underperforming CEO is everywhere now suddenly investors are urgently interested in issues he has been talking about for years. Ralph thank you for being with us. Thank you Jeff. You have been in a lot of boardrooms on a lot of boards you've seen a lot of troubled companies from the inside. When you look at Enron Worldcom Tyco Global Crossing all these others. Who's to blame. Well you've got to start with the management and the board. You can't get away from that. But if that's where we stop then we will have done ourselves a

disservice in corporate America because each of those cases remember are different different situations. One involved in executives outside activities. Another one was a big accounting fraud apparently. Another one was poor risk management at the company and so on. And so what is the common denominator there. The common denominator is is that the dynamic was missing in those boardrooms where someone in the case of Enron didn't blow the whistle and raise their hand when the board was asked to waive their ethics policy for example and say My goodness if we have an ethics policy why would we ever waive it and then have a long debate over whether or not they should do that. That isn't how it took place so why is that dynamic missing. Because by and large these are good people they're honest. They have good backgrounds they have integrity as far as we can tell and I'd say 99 percent of corporate board members fit that description. So why is that I get asked How can this happen. Well I think it's because this dynamics missing. Why is that

missing. Because the way we compose the boards you dance with who brung you. Right right. Meter the board members don't want to offend the guy who invited him onto the board which is the CEO right. And so. What can shareholders do about that that's the question OK. There's the tools are already there. People are talking about what do we need to do what laws we need to change the laws of already been changed they were changed in a big way in 1902 that was a big reform. Well you're being modest because you were one of the main forces behind that big reform. Well OK but so Cheryl what can they do. They can vote against directors. They never do. There's a box that says all nominees and there's one that says some but not these. Right. You never mark they never mark that one. The other one is now after that reform you can actually nominate a director the shareholder can where you couldn't do that before an individual director or or a few. Right. But that isn't done by institutional investors and I'm really talking about institutions here primarily because they're the ones

with the resources and the research ability to do this. So that's another place to place some blame on the leading institutions that own so many of the shares in these companies. Absolutely. And why don't they do the stuff that you do because your fund has proven. I think that it works. It works financially. It does work. And why they don't is something that I struggle with but I think that some of them aren't structured appropriately for that and that that may be more important reasons for the way they're structured. Some of them don't have the right incentive and incentives. Some may even have conflicts of interests that they cause and not to want to do that but whatever it is if we don't focus on the demand side of this equation from the shareholders and we're going to miss a huge part of it. Well now you're looking for companies that fit your pattern right now companies that you can improve by going to work on them. What do you what do you like now.

What are those companies to do OK well I'm not going to tell you the ones that we're working on right now. Because hopefully if we understand him better than the other guys out there will be able to buy him at a better price. Right. But it's ok your big position OK are big positions right for example ConAgra one that was in the news today. Yeah that's a company that has a turnaround underway. Yeah. In the news today by the way because they recalled some beef they recalled 900 million pounds of beef. That's a company that I think that was an overreaction. It's a it's a wonderful company a whole set of brands that has been overlooked. The management has initiated a turnaround going back the last six seven months and they've taken concrete steps and we think they are on a on a path to over the next few years which is going to be an excellent turnaround. Who else. The other one out there is Aetna. Wow and that's a bit of a surprise. I don't know if you know but Jack Roe is the new CEO there and he was hired from a nonprofit institution. There was a lot of skepticism. But what it tells you is somebody that's smart as well that surround themselves with smart people can do these jobs too and he's

doing a heck of a job there and so I'd look closely at that one. Stock's gone up quite a bit so maybe some of it's already out of it maybe it's happening. Another company in the news this week was AOL Time Warner the parent company of Fortune magazine. The stock is down 75 percent or so over the past 12 months. The CEO Bob Pittman left yesterday. It turns out he got sixty six million dollars gain on options that he exercised last year when of course the stock was a great deal higher than it is today. Are you OK with that. Well that's a tough one. You know I don't know. Certainly I don't know what he was thinking or what kind of information he had I'd be surprised if he would've been able to see out this far. But what it does point up is that managements and board members need to be extremely cautious and extremely reluctant to sell shares while they're still at the company. And there are situations in fact we have sold shares at times while we've been involved

companies but boy let me tell you that is a decision that you should think long long long and hard about. You were involved in one of the biggest messes in corporate America up until the recent rash of them which was waste management. In fact you became chairman of that board of directors for a period of time. What you learn I learned a lot. First I want to point out that that company has gotten caught up in a lot of this and and there are these events occurred back in 98 99 and that companies has an outstanding turnaround underway and a great management team. But what did I learn I learned one is that management arrogance is a red flag. And I think people probably learned that from from maybe Enron and some of these other cases too. But when you see an arrogant management that isn't doesn't want to be bothered by the pesky little questions and feels oh if they're confident they want to be able to stand there all day answering questions at at all that's how I and how can a regular individual investor spot that pretty tough that the board can spot it.

Yeah. And if they don't have time for the board or they're rushing through the meetings or feel or are you feel like you're put off if you ask a tough question you better be careful if you're on those boards. OK. And I think there's probably ways that an individual could see that too. The other one I learned is if you're going to take a bath get all the way in. OK. And that's what we did at Waste Management when I became chairman. You may recall we brought in twelve hundred outside auditors. People said my goodness but what we did is we scoured every last balance sheet the company came out told the shareholders where they stood and then went on from there. And that way we didn't have to go through years or months of Chinese water torture meaning you got the bad news out and behind you and then you could proceed. Yes. You were instrumental in getting some rule changes made about the reporting of CEO compensation. As you look back what's been the effect of that. I don't think it's worked anywhere. The way we thought it was going to and I was you know I thought that this was going to make a sea change and it hasn't.

The reason I think it hasn't is again because we don't have this dynamic in the boardroom. So even though we've had these describe what you're talking about is the disparity between pay and performance that we were seeing in the early 90s and it actually exploded even worse despite all the new disclosure in the late 90s. And that still has to come from the demand side. The shareholders are there and there are those out there that are trying and those that make efforts you know calipers out in California. Shannon O'Brien the treasurer of the state of Massachusetts is out front of this she understands where it needs to come from. Bill Miller here at Legg Mason right. I mean you go through a list I shouldn't single out folks but still it's a it's an inch deep and a mile wide. Yeah. We've talked about what institutional investors can do right now you are talking to an awful lot of individual investors. OK. And we've only got a few seconds left but what's your message to them.

My message is is don't don't feel like you have to go excuse the market. If you look at this country's history we still you know it's a tough system. And some people say it's a bad system but only until you consider all the alternatives. We have the best system in the world we have the best financial markets we have the best companies we have the most integrity within our companies. So long term the equity markets outperform all other asset classes. So if you're thinking about your retirement or or some long term objectives don't flee the equity markets keep the faith. Yeah. Thank you very very much. You bet. Care. Well next week don't look for the dog days of summer to set in. At least not just yet. It's a pivotal week for stocks with earnings from market movers. 3M and 1819. And we'll also see if the housing market continues to be the one bright spot for investors with new numbers on home sales it's incredible how housing has held up. Even as the stock market has gone. Into such terrible trouble by the way.

On the show next week. The one and only you know the one and only Donald Trump. Even if you cannot invest like him don't worry because we're going to look at ways for you to get into this booming sector of real estate. One more programming note last week we promised you Pfizer chief Hank McKinnell Well events like his acquisition of pharmacy outpaced to 60 big 160 billion outpaced a schedule and we are working to reschedule him. Well that's it for now. Goodnight everybody. So long. We'll see you soon. To learn more about this program visit PBS online at PBS dot org America Online keyword PBS for a transcript of this program. Send a $5 to transcripts Wall Street Week With fortune. Maryland Public Television Owings Mills Maryland 2 1 1 1 7.

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