October 15, 1998

Inside Business Week's "Inside Wall Street",
Part 2

by Louis Corrigan (TMF Seymor)

As might be expected, Marcial has hit some homeruns, but he's put together a relatively poor batting average in the clutch. Marcial swings at takeover targets nearly every week, but rarely makes contact. And this during a period when America has seen more mergers and acquisitions than ever before.

In his review of companies profiled during 1997, Marcial talks up the times he got a takeover target right, or at least kind of right -- at least eventually. For example, the June 30, 1997 issue mentioned Bank of New York (NYSE: BK) as a potential acquirer of Mellon Bank (NYSE: MEL), and over six months later, Bank of New York did make an offer for Mellon. Homerun! The August 11 issue said "a New York bank" was looking at Salomon Brothers. Yet it was actually Travelers (NYSE: TRV) that Solly merged with in a deal announced six weeks later.

TheStreet.com did its own survey of Marcial's work last year and found that a number of rumored takeovers never happened. Northwest Airlines (Nasdaq: NWAC) didn't go after Alaska Air (NYSE: ALK). A "large optical company" eyeing Sterling Vision (Nasdaq: ISEE) apparently didn't like what it saw. Hilton (NYSE: HLT) was said to be interested in Circus Circus (NYSE: CIR), but it must have been just clowning around. Other rumored targets that missed their marks were Sungard Data Systems (NYSE: SDS), Gryphon (Nasdaq: GRYP), Carter-Wallace (NYSE: CAR), Stride Rite (NYSE: SRR), and Golden West (NYSE: GDW).

We at the Fool took a look at Marcial's columns from 1996 and found similarly poor results. Indeed, just the first two months (from the '96 preview issue of December 25, 1995 through the February 26, 1996 issue) offered 11 examples of rumored takeovers. Only four of these companies were later involved in deals, one just last month. And that's about as good as the column's batting average gets.

Fay's (formerly NYSE: FAY) was acquired by JC Penney (NYSE: JCP) after agreeing to a deal in August 1996. Meanwhile, Smith's Food & Drug Centers (formerly NYSE: SFD) merged with Fred Meyer to form the new Fred Meyer (NYSE: FMY) in September 1997, about 20 months after the stock was mentioned as a target for American Stores (NYSE: ASC).

Next, Bob Olstein of the Olstein Financial Alert Fund said General Motors (NYSE: GM) needed to bring its share price closer to the value of its assets or else a Kolberg Kravis Roberts or Kirk Kerkorian would come in and do a leveraged buyout. About 20 months later, GM did spin off its defense electronics business (which merged with Raytheon) as part of a more elaborate transaction to increase shareholder value.

Finally, Hasbro (NYSE: HAS) announced just last month that it would buy Galoob Toys (NYSE: GAL) for $12 a share. So 32 months after Marcial noted that Galoob was "takeover bait," the stock was acquired at a whopping 14% premium to the price seen in January 1996.

Yet the other seven companies weren't acquired and, as a group, have done so-so. Glasgal Communications (formerly Nasdaq: GLAS) did so badly that it changed its name to Datatec Systems (Nasdaq: DATC). Angeoin (Nasdaq: ANGN) collapsed. Roberts Pharmaceuticals (AMEX: RPC) did nothing.

The only stellar performer among these eight was American Express (NYSE: AXP), which didn't do much over the six months following the column but ultimately went on quite a run before getting crushed in the recent sell-off. Curiously, Marcial touted Jerry Seinfeld's favorite card company as a merger target for "another huge financial-services company," which he later identified as GE (NYSE: GE). That rumor didn't pan out, so just a week later he talked up GM as the likely suitor, at least according to "one investment banker who has been right on the mark in spotting takeovers." Not this time.

While smaller companies have underperformed the market over the last few years, surely the pros would have at least avoided the real disasters. Well, not exactly. Many of the small cap stocks Marcial profiles would have made fantastic shorts. The disaster that is EquiMed (now OTC: EQMD) offers a cautionary tale with broad implications. Profiled in the July 29, 1996 issue, the stock eventually plunged from a split-adjusted $43 1/2 to $1/8 by October 8, 1998 on the way to being delisted from the Nasdaq.

Marcial profiles more than a few EquiMeds each year. Technical Chemicals & Products (Nasdaq: TCPI) offers one recent example. The stock traded for $15 11/16 when the November 3, 1997 issue talked up the firm's noninvasive glucose-monitoring system for diabetics. One Boca Raton research firm was said to be expecting earnings from Technical of $1.34 per share this year and $2.99 in FY99. For the first six months of FY98, though, Technical Chemicals has lost $0.48 a share. Along the way, the company has conducted a highly dilutive discounted convertible preferred offering to raise cash. Its Chair also contributed to the stock's recent rout when he suffered a personal margin call that forced him to liquidate some of his holdings. The stock has withered to $4, though it's well off its lows.

Here are six other real losers from 1996; stocks that (as of October 8, 1998) had lost over 80% of their value since Marcial featured them.

 Company                       % 6 Months  10/8/98 
 Quarterdeck (Nasdaq: QDEK)*       -44%     -95% 
 Precision Systems (Nasdaq: PSYS)  -61%     -92% 
 Green Man Tech (Nasdaq: GMTI)     -54%     -92% 
 Ampex Corp. (AMEX: AXC)           -28%     -92% 
 Warp 10 Tech (Nasdaq: WARPF)      -31%     -88% 
 Swisher Intl (now OTC: SWSH)         +20%     -87% 

*The Fool Portfolio actually shorted Quarterdeck on September 27, 1996, about a month after Marcial's column ran a bullish piece on it.

Then there are the short candidates. Three of the four short picks from 1997 were actually up instead of down after six months. Indeed, two of these loser shorts came from the same Bob Olstein who called the GM restructuring. He suggested shorting Best Buy (NYSE: BBY) just before it staged a phenomenal rally. This call proved so bad (a 101% loss in just over three months) that Marcial made a rare about-face. He returned to Best Buy in October when Bill Harnisch of Fortsmann-Leff Associates offered very aggressive but quite prescient comments about the excellent prospects for this consumer electronics retailer -- which has continued to soar. (Olstein's other losing short -- Cooper Cameron (NYSE: RON) -- eventually became a big winner because it tanked with the rest of the oil services stocks.)

Looking at the 1996 short calls, we find better results. That's partly because three of the seven picks (Horizon/CMS, Physician Reliance Network, and Excel Communications) came from Howard Schilit, author of Financial Shenanigans, and an expert at spotting accounting gimmicks. Particularly during a bull market, the short-picker's expertise makes all the difference in the world.

 Company                         % 6 Months  10/8/98 
 Horizon/CMS Healthcare (NYSE: HHC)    +64%     +39%* 
 Micro Warehouse (Nasdaq: MWHS)        +32%     +47% 
 Physician Rel. Network (Nasdaq: PHYN) +24%     +58% 
 Excel Communications (NYSE: ECI)      +18%     +48% 
 CNS (Nasdaq: CNXS)                    +13%     +79% 
 Trust Co. New Jersey (Nasdaq: TCNJ)    +2%     -32% 
 InVision Technologies (Nasdaq: INVN)   -4%     +67% 

*Assumes short was covered 2/18/97, the day after Horizon/CMS announced a merger with HealthSouth.

What's an investor to do with all this? For starters, no one should be buying a stock just because Gene Marcial has found some "New York money manager" who says good things about it. As we've seen, the would-be takeover targets aren't likely to do a mating dance at all. The ones that do may not find a partner for many months. Secondly, the small cap stocks he mentions may prove no better than what you hear touted at your local cocktail party, so don't imagine the "Inside Wall Street" seal of approval means much of anything.

Investors need to recognize that most of Marcial's stories come to him from people with money on the line. One suspects these "pros" know that the column can give a stock a temporary boost. No doubt they sometimes use Marcial to ease themselves out of a large position. You can just get a much better price when demand for a stock spikes. Given that a number of the little known small caps he highlights peak shortly after his column runs (see Technical Chemicals), investors should be especially hesitant to take the bait before doing extensive due diligence themselves.

The larger issue, though, is that "Inside Wall Street" is really not much more than a "tip-sheet" product that plays to a novice investor's appetite for hot stock ideas. Investors ought to simply ignore such garbage. It's not just that the stocks Marcial profiles don't do so well, on average. The real problem is that investors can become distracted from their ultimate goal of investing in outstanding businesses at fair prices if they're always focusing on what some "money-runner" thinks.

That's not to discount the fact that some professionals may know a lot more than the little guy. After all, you would expect experience and training to be worth something. It's also not to suggest that a journalist can't produce a useful product serving as a kind of critical conduit for such opinions.

Herb Greenberg at TheStreet.com does just that and in fine fashion. But more often than not, the "pros" he quotes (sometimes anonymously) are making investment arguments based on information contained in the public filings. Greenberg isn't just repeating rumors, then. He's conveying analysis that individual investors can evaluate independently. Plus, Greenberg often returns to a story later if more information becomes available. The result is an ongoing, often highly educational conversation that often includes rejoinders from readers.

Indeed, as cocky as he can sound, Greenberg succeeds partly because he brings to the endeavor an understanding that his sources may prove wrong and that his own judgment can fail him. Thus he has an implicit respect for his readers, which opens up a space for dialogue. As I suggest in the accompanying book review, Marcial's whole approach appears fundamentally different, built on contempt for his readers, whom he sees as hopelessly outside the information loop.

That's ultimately what makes "Inside Wall Street" such a crummy product. Frankly, it's not surprising that Greenberg's work appears on the Web and Marcial's work appears in an oldguard financial publication. It's his mindset as much as his product that comes up short.

Next -- A Gene Marcial Book Review