has been preaching the merits of his
quality-of-earnings approach since the '60s.Now he's bringing his
message to the masses through his
own mutual fund.Bob Olstein
can barely contain himself.Bouncing up and down in his
chair , he
arms and erupts : Look at this stuff.It's Disneyland.It's fantasyland.Who do these people think we are.Do they think we're idiots? Olstein can work himself into a frenzy reading corporate annual reports.But then , the founder of the eponymous Olstein Financial Alert Fund has alwaysseen far more in annual reports than most other readers.Olstein , 56 , first made a name for himself in 1971 by co-founding the Quality of Earnings Report , a controversial newsletter that didn't take corporate financial statements at face value
.Instead , he
and partner Theodore O'glove dissected these statements.Were rising earnings attributable to selling more widgets at higher unit prices.Or was management booking revenues that hadn't yet actually been collected.Were earnings inflated by selling the headquarters and leasing it back.Were unrealistic actuarial assumptions making it possible to reduce pension contributions and boost profits.
not only buys undervalued companies but also shorts overvalued ones based on his
dissection of balance sheets.My view is : The guy who makes the fewest mistakes is the guy who wins in the long run , he
days in his
Purchase , New York , office doing what he's long done , poring over annual reports and financial statements.Benjamin Graham and Warren Buffett didn't need computerized screening programs to find good values , he
declares , and neither does he
.Nor does he
trust investor relations executives or Wall Street analysts.Instead , he
sticks to financial statements.I read at least 200 pages a day , he
says.-- I've developed what I call the reverse quality-of-earnings portfolio , he
adds : defense , defense , defense first , and price , price , price second. Olstein's starting point : the corporate treasury.You have to find excess cash flow , he
wants companies with enough cash to control their oven destiny and not be forced into expedient decisions.
To calculate the right price , he
estimates the cash that could theoretically be taken out of the company.You need to figure the cash-on-cash return and compare it with [ the return on ] riskless U.S. Treasuries , which is an alternative , he
computes the company's worth in the private market and compares it with the current stock price.
We say you must get at least a 50 percent premium on the private market value over what you'll pay for that company , he
says.We buy what other people think of as large-cap and small-cap stocks , cyclical and growth stocks.We don't think you should pick your physicians by their height , and you shouldn't pick your stocks by their size..
These days New York-based clothing designer Donna Karan International is a stock he's following closely.The company , which went public last year at $24 and shot up to $30 before plummeting to $9 , has proven they can market and sell , but they're not able to bring anything to the bottom line , he
applauded the company's hiring of Morgan Stanley & Co. executive Dewey Shay as chief administrative officer last November , and he
welcomed Donna Karan's repurchase of its jeans license this year.
Others saw this as a jeans deal disintegrating , but Olstein
felt that by gaining greater control over downstream marketing , the company could earn about $1.50 a share , and that would send its price up to $20.When Olstein
appeared on CNBC's Squawkbox in April , he
talked up the stock , which promptly rose 19 percent.
admitted , I'm beginning to think this is going to be a mistake. Nonetheless , he
has continued to see value in the company , and he
insists that if and when the company adds some professional management , the share price can climb to $15.I like buying on a negative..Olstein
is also enamored of JSB Financial , which he's bought and sold several times since 1993.The former Jamaica Savings Bank has 20 percent of its assets in shareholder equity , he
points out , so it's underutilizing leverage. JSB could easily double its earnings , either on its own or if it were acquired.
Although Olstein views himself as a long : term investor , companies appear and disappear in his
portfolio.Every stock has a value on my list.If something changes in value , I'll sell , even if it's down 40 percent , he
says.An example : San Jose , California-based Novellus Systems , which makes computer chip fabrication equipment.He
bought it last summer at $38 , rode it up to $89 , which he
considered fully valued , and sold it earlier this year.He
still liked the stock , so when it fell , he
repurchased a chunk at $64 and watched it climb back to $80.Then the company got snarled in a lawsuit , and Olstein
decided that its value had decreased.So he
sold it at $59 this spring and watched the price sink even further.In late spring the company settled its suit ; Olstein
says he's still following the stock.
Earlier this year he
ran across Stafford , Texas-based Input/Output , which produces seismic data equipment for oil and gas exploration.Profits rose more than 40 percent in 1995 , and the stocks price-earnings multiple climbed to 30.But in reading last year's financials , Olstein saw that Input/Output had to double its guarantees on installment sales contracts.And in Russia , a major Input/Output market , down payments on new equipment had dropped from half to 15 percent of the price.He
shorted the stock.
Unlike most mutual funds , the Olstein Financial Alert Fund can go short.
I'm usually not very interested in making money On the short side , Olstein
says.But if I can pick up something for the fund , fine. Other recent shorts have included Boston Chicken and Baby Superstore.After growing up on the Bronx's Grand Concourse , Olstein earned a BA and an MBA from Michigan State University before joining New York brokerage Scheinman , Hochstin & Trotta in 1968
met O'glove , and they began analyzing companies using conventional methods.
After the pair were stung by several earnings surprises , we said , 'Let's start a report that stops this crap from happening , ' recalls Olstein
.By disaggregating financial statements and pouncing on signs of deteriorating earnings , he
crows , we ripped up Levitz Furniture and McCulloch Oil.We predicted the Penn Central bankruptcy.We uncovered some of the biggest earnings disappointments of the day..
In 1994 , while with Smith Barney ( which had by then acquired Shearson ) , he
had an epiphany : My account size had gotten to the point where the average client had about $600 , 000 , bur the average age Was in the low 60s.I had gone through a divorce , and I had remarried and reestablished my life , and I said : 'You know something.I'm looking at these yuppies and what they're doing with their money , and there's a real need for somebody who's going to go out and play defense , defense , defense for them.' A mutual fund , he
concluded , would allow him to gain a broader clientele and help him build a business , rather than a personal following.
then incorporated Olstein & Associates as an investment advisory firm in spring 1995.He
says that all of his
Smith Barney wrap-fee clients moved their money ; some $70 million in assets , to the new fund when he
launched it in September.
New investors are being invited in on Olstein's terms.We couldn't care less that our fee structure is high , he
says bluntly.The fund's expense ratio hovers around 2.43 percent , including the 1 percent advisory fee it pays Olsteins firm.We don't want to be in the Schwab no-load program , Olstein
says , adding , I want a brokerage system behind me so that the brokers can hold the clients' hands and say , 'This guy is a three- to five-year player.' I don't want my philosophy turned around by people trading my fund , so I purposely set a two-year exit fee --a sliding scale , starting at 2.5 percent for early defectors.
With the market soaring as the 'fund opened , Olstein
found few stocks that met his
stringent value criteria , so he
kept a sizable cash hoard.But declining prices earlier this year led him to reduce cash exposure from 25 percent of assets to 15 percent.He's spread his
money among some 80 stocks , including airlines and utilities , and he
was an avid buyer of high-tech stocks when they were being battered last year.But he
also sees value in lower-tech names like General Motors Corp.
and financial printer Bowne & Co.
These days Olstein rails against mindless new approaches , like indexing and momentum investing , which he
believes drive share prices up and down without attention to fundamentals.Above all , he
remains faithful to the notion that corporate managers will always try to gild the lily.Will it ever stop.Not in my lifetime , he
laughs.Robert Olstein : The fundamental