A Look Back: Some Good Calls and Some Catcalls

Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks. Today’s column takes a look at some of their 1998 calls.

Mike: So, Jim, today is the moment of reckoning.

Jim: That’s right. We decided for better or worse, since it’s the end of the year, to go over some of the recommendations we’ve made in this column. I’ll start by saying there’s nothing wrong with having a good dose of humility once in a while.

Mike: Well, let’s give credit where credit is due. We’ve had some good picks . . .

Jim: . . . and some bad ones.

Mike: Do you want to add that past performance is no indicator--

Jim: --of future results?

Mike: Right, but our goal is not actually to rack up gains and avoid losses but to give our readers a straightforward assessment of what really should go into stock evaluations.

Jim: Exactly right. So we thought we’d take this opportunity to go over a few of the stocks that we talked about in the column. To give ourselves a fair shake, we’re looking only at stocks that were in this column at least three months ago, so they’ve had a chance to build up a track record.

Mike: Now, the best way to get over our hubris in a hurry is to look at a stock that I think exemplifies the rule that sometimes in investing you just don’t know nothin’. I’m talking about the very first stock that we did in this column, Amazon.com.

Jim: This being, of course, the online seller of books and music that hasn’t made a profit yet and isn’t expected to until at least the year 2001.

Mike: We both recommended that investors stay away from this stock in mid-July, when it was selling at about $100 a share. Since then, it has gained a mere 226%.

Jim: As we speak, it’s actually broken the $350 barrier.

Mike: Nevertheless, I am not ashamed of advising readers not to touch this stock. How about you?

Jim: I’m not ashamed of it at all. Don’t forget, there are plenty of people around who were screaming at the top of any building they could find to short this stock at $100.

Mike: Yes, and if you shorted this stock at any time in the last six months, you’ve gotten killed. Nevertheless, what we said back then is even truer now: If you assume that in the year 2001 that Amazon.com will be the only bookseller or CD retailer left on Earth and that it will reap all the profits from that monopoly, it’s still trading at a ridiculous price today.

Jim: What that points up is that the conventional yardsticks for valuing a stock in a few selected cases just don’t apply, though eventually they will apply. Sometimes momentum just takes over. I mean, Amazon exemplifies why the phrase “Don’t fight the tape” came about.

Mike: The way I would put it is that the classic rules still do apply. What’s different here are the rules for how you value investor sentiment. That’s what’s out of whack here--though, granted, if you joined the bandwagon in July you would have made a ton of money on Amazon.

But what people are responding to here is the mysterious allure of the Internet rather than what they should be looking at, which is the real value of this business and its prospects, which I think are nowhere near as gaudy as the stock market believes.

Jim: Let’s change the subject now and talk about one that we got right--Sun Microsystems. I’m happy to report that since we recommended Sun in mid-August, this stock has gone up a princely 75%.

Mike: We pointed out the potential in a wide range of its businesses. Sun’s got a lot of ventures out there in which they are positioned as the alternative to a lot of other technologies, and they’re turning out to be a very well-run company.

Jim: I would add that the Java computer language, which Sun developed and basically controls, continues to look like it might be a home run for that company.

Mike: Right.

Jim: Particularly vis-a-vis Microsoft. Then there’s continued strong growth not only in their applications business with Java but also in their workstations and so forth. Now, that leads us into the networking business, where we came up short.

By that I mean Oracle.

Mike: That’s right. Our doubts about Oracle focused on their management team of Larry Ellison and Raymond Lane.

Jim: Oracle had taken a beating after its once-sizzling growth rates began slowing down. There was some question as to whether Ellison had taken his eye off the ball, because Oracle was just floundering. But it was about that time that the computer/Internet networking stocks as a whole just took off. Oracle went right with them, and I’m sad to say it’s up about 65% since we said don’t buy it. So that one we’d just as soon forget about.

Mike: Now, on the other hand, we did have a good day on Sept. 22, when we both recommended that people stay away from Planet Hollywood and buy Chase Manhattan. The first has lost 40% since then because of a continuing deterioration of its business.

Jim: That same day we recommended Chase, the nation’s largest bank. Just last week, Chase said its fourth-quarter earnings were basically going to blow away Wall Street’s estimates.

Mike: Right, and since our recommendation for a buy on Chase Manhattan, it’s gained 52%. What we spotted there was a sign that Wall Street had excessively undervalued large banking stocks out of fear of exposure to Asia and Russia and wasn’t giving enough credit to some of these banks for actually controlling their exposure.

Jim: There are a couple other picks we should be proud of. We picked Anheuser-Busch in mid-September. Because the market was in trouble at the time, we saw the brewer as a classic defensive stock. Since then, it’s been a nice, slow, steady gainer, up a solid 18% or so, a very decent gain.

Mike: Of course, we also split on a few stocks, and I think you’ve been right on about as many of those as I have, which I suppose just goes to show you that diversification is the way to win overall.

Jim: I’ll give you the honor of bragging first.

Mike: All right. Does the name Boeing mean anything to you?

Jim: Oh, brother.

Mike: Not that I’m happy to see the pain that’s being spread in Seattle and Long Beach by this company’s continued management problems. But in our very first column I recommended against this stock, despite your arguments.

Jim: I suspect this is the one I’m the most disappointed with.

Mike: Well, you thought Phil Condit, the company’s CEO and chairman, was finally gonna get his arms around their multitudinous production snarls and their Asian sales problems. I thought there was still a lot of pain ahead.

Jim: Not only did he not get his arms around them, they’ve basically squashed him.

Mike: As we speak, his job is on the line.

Jim: And should be. The problems keep mounting and mounting, and all signs out of Seattle are that they’re not quite sure how to fix things. Mike, it’s gotten so bad that for the first time they’re going to start charging people to take the tour of the Boeing manufacturing plants in the Seattle area. Boy, that will help the stock. Boeing is just a terrible disappointment because I honestly thought it had the management team in place to stop the bleeding. Clearly it doesn’t.

OK now, since turnabout is fair play, a call I’m especially proud of is Mirage Resorts.

Mike: I was afraid you’d say that.

Jim: As you recall, when we talked about Mirage in early August, you were of the opinion that their brand-new Vegas resort, the Bellagio, was going to really give this stock a kick.

Mike: Well, I was predicting that it would be popular among everybody. Apparently it’s been popular among everybody except investors.

Jim: I had problems with this stock months before the Bellagio opened, which was in October. And because of myriad problems in gaming, namely that there are a lot fewer high rollers from Asia, that there’s a glut of casinos in the U.S. and so forth, Mirage already was showing terrible weakness. I just wasn’t convinced that Bellagio could single-handedly turn Mirage around. Apparently that’s been the case, because Mirage is down 33% from when we talked about it.

Mike: Back to stocks we were together on, how about Disney and Apple?

Jim: We both recommended Walt Disney, and I would still recommend it today. The stock continued to waver for some time after we recommended it in late July. It basically put out earnings postings that were not thrilling. There was concern that some of its movies weren’t going to do as well as previously thought. But I still think it’s a rock-solid company. The stock has started to come back, and I’d maintain my recommendation on that one.

Mike: As would I.

Jim: As for Apple, this stock had made a huge rebound this spring based largely on the introduction of its new PC, the iMac. But you and I predicted that the momentum of this company would stall.

Mike: And it did.

Jim: There hasn’t been any serious erosion of Apple’s earnings or performance, but I think a lot of people are asking the question, “What are you gonna do next?”

Mike: Apple hasn’t stopped talking about how the iMac is the single most successful computer in terms of sales in every month since it’s been introduced, through November at least. I think that’s a little misleading.

First--and boy, we’re going to get cards and letters about this again--there’s a lurking dissatisfaction still with some of the elements of this computer, including a mouse that’s very hard to use and the lack of an integrated removable storage disk. Some buyers are probably discovering right about now that to get this computer in a condition they’re fully comfortable with, they’ve got to buy a lot of add-ons that add significantly to its price.

Jim: I’ll tell you a story. I was in a Best Buy store the other night where there was an iMac on display. A boy of about 10 or 11 was with his mom, and he said, “Hey, an iMac!” As the mom caught up with him, the first words out of her mouth were, “Yes, but it doesn’t have a floppy drive.” Here was an average citizen who was already aware that the iMac was lacking a component I guess a lot of people still like to use.

Mike: Also, as many of our readers are aware, Apple manufactures the one real appreciable rival to PCs using Microsoft Windows.

Among desktop computers, if you want a Macintosh system, the computer to buy is the iMac. But if you’re satisfied with a Windows interface, you can spread your business among hundreds of manufacturers. So the question really is whether the iMac is selling better than all the $1,000-to-$1,200 PCs offered by Gateway, Compaq, Hewlett-Packard, Packard Bell and all their brothers-in-Windows.

Jim: This all goes right back to our original premise, which is that the iMac would provide Apple with some incremental sales above their core user base, but not a lot.

Mike: Right, and I think that’s what’s up.

Jim: Well, there you have it. I figure we’re hitting just under .500 so far, Mike, not unlike many top-paid money managers.

Mike: We’re off to a decent start, and of course it’s all in a good cause.

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Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at michael.hiltzik@latimes.com; James Peltz can be reached at james.peltz@latimes.com. Or write to either at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.

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Win Some, Lose Some

A look at the performance of stocks reviewed by James Peltz and Michael Hiltzik in their Stock Exchange column. For the first 19 stocks they discussed, performance through Monday has proved Hiltzik right nine times, Peltz eight. Naturally, time will continue to alter the results.

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Ticker Rec Rec Mon Stock symbol Peltz Hiltzik date date close Amazon.com AMZN Don’t buy Don’t buy 7/14 $108.00 $351.94 Boeing BA Buy Don’t buy 7/14 48.00 32.50 Walt Disney DIS Buy Buy 7/21 38.56 30.44 Scudder Japan SJPNX Don’t buy Buy 7/21 7.51 8.00 Apple Computer AAPL Don’t buy Don’t buy 7/28 34.44 40.88 Rockwell ROK Buy Don’t buy 7/28 41.56 46.56 Oracle ORCL Don’t buy Don’t buy 8/4 26.63 43.88 Philip Morris MO Don’t buy Don’t buy 8/4 44.13 54.00 Mirage Resorts MIR Don’t buy Buy 8/11 20.94 14.06 AirTouch Comm ATI Don’t buy Buy 8/11 58.63 67.50 Sun Microsystems SUNW Buy Buy 8/18 48.63 85.00 Intuit INTU Don’t buy Don’t buy 8/25 48.88 72.25 Goodyear Tire GT Don’t buy Buy 8/25 53.63 49.63 MediaOne Group UMG Buy Buy 9/8 43.63 46.31 Best Buy BBY Don’t buy Buy 9/8 46.13 59.00 Anheuser-Busch BUD Buy Buy 9/15 56.19 66.38 PacifiCare PHSYB Buy Don’t buy 9/15 77.00 77.00 Chase Manhattan CMB Buy Buy 9/22 46.81 71.38 Planet Hollywood PHL Don’t buy Don’t buy 9/22 4.06 2.44

% Stock change Amazon.com +226% Boeing --32 Walt Disney --21 Scudder Japan +7 Apple Computer +19 Rockwell +12 Oracle +65 Philip Morris +22 Mirage Resorts --33 AirTouch Comm +15 Sun Microsystems +75 Intuit +48 Goodyear Tire --7 MediaOne Group +6 Best Buy +28 Anheuser-Busch +18 PacifiCare 0 Chase Manhattan +52 Planet Hollywood --40

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Source: Bloomberg News