Liz Claiborne Is Left Hanging; Colgate’s Performance Shines

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate merits of individual stocks.

Jim: I’ve been looking forward to today’s chat. Know why?

Mike: I’ll bite, Jim. Why?

Jim: Because this is one time we get to discuss two companies that actually make something--and it’s even easy to understand what they make. These are perfect stocks, in fact, for famous value-stock managers Peter Lynch and Warren Buffett, who always shy away from businesses they don’t readily understand.

Mike: And Buffett, in fact, has taken a nice position in Liz Claiborne.

Jim: Right! Do you like the way I set that up?

Liz Claiborne (LIZ)

Jim: Let’s start with La Liz, the maker of women’s apparel. Liz Claiborne is instructive for novice investors, I believe, because here’s a strong company with savvy management--and it has stock I wouldn’t touch.

Mike: Really? The stock’s chart certainly indicates you’re in good company. Nobody seems to be buying this stock--and that’s why I disagree with you. You’re right, Liz Claiborne is a good company, and it has a stock that’s crying out to be bought right now.

Jim: It would seem that way.

Mike: But you just said you wouldn’t buy it!

Jim: I agree that it appears to be a screaming buy. But that’s a bear trap, because no one is buying it with the exception of, as we mentioned earlier, Warren Buffett.

Now I know he’s a billionaire and all, but I’m actually going on record that Warren has this one wrong, at least for the next 12 months. Buffett is well-known for holding stocks for a long, long time and patiently waiting for them to flower. And as much as I like Liz Claiborne, that’s exactly what someone would have to do to make any money with this stock.

Mike: As for me, I look at this chart and think, “What is wrong with everybody?” This is a company that keeps coming through with great earnings--by the way, just last week it beat Wall Street estimates again with a 6% gain in quarterly profit and an 11% rise in sales. It’s got a well-defined strategy and is executing on all cylinders. It’s a company that aims to be the Procter & Gamble of apparel by being very diversified, and may well achieve that. Am I missing something?

Jim: No, and it also has a sparkling balance sheet, with no long-term debt.

Mike: It’s also acquiring licenses and brand names ranging from Russ to Donna Karan to Laundry--an appropriate name, since we’re about to move on to a soap and housewares company after this discussion. Laundry, in this case, is a women’s sportswear and dress maker. Point is, Liz wants to have clothes for every age group and in every segment of apparel retailing stores.

Jim: And the net result of that is a stock that hasn’t budged in a year.

Mike: True, in the last year this stock gained a queenly 7.8%.

Jim: Worse, for the last five years, this stock has badly trailed the S&P; 500.

Mike: Although it easily outpaced the S&P; apparel stocks index.

Jim: Now you’re getting to the heart of my problem with this stock. First, let’s back up a bit. This company, of course, was started by Liz Claiborne and her husband, and she set the world on fire in the ‘80s by creating perfect apparel for the growing number of women then entering the business world.

Mike: She was a superstar. I read stories about her showing up at stores and being mobbed by her admirers. Guess you could say she was, in her industry, the Martha Stewart of her time, which is a lesson for Stewart’s new company--Martha Stewart Living Omnimedia--both on the down and upside.

Jim: True. But about the time Liz Claiborne retired in the early ‘90s, the company fell asleep at the switch. Tastes changed as they always do, women were able to dress more casually at work, and Liz Claiborne--the company--floundered. But in 1995, it hired Paul Charron, its current chief executive, and he’s done a masterful job of turning things around.

Mike: Yeah, and Charron can be forgiven if he wakes up in the morning and looks around and asks, “Where is everybody? Where are the stock buyers?” Well, to me it’s time to start buying.

Jim: No, it’s not. Look, I’ve interviewed Charron and find him to be a very sharp guy who knows his industry. But Liz Claiborne is trapped in a mind-set on Wall Street that investing in the rag trade is dead money. All apparel stocks have gone absolutely nowhere because everybody’s money is going after high-tech and other sectors. The feeling is that apparel fluctuates too much, it’s too faddish, too unpredictable. I mean, Tommy Hilfiger just had to close its main store in Beverly Hills, and Donna Karan has struggled. Investors are simply turned off.

Mike: Still, the one thing that we have consistently been telling our readers is to look for hidden value.

Jim: You mean, to trust yourself if you find a solid business with an cheap stock.

Mike: Right. So here’s a stock trading at a price-to-earnings multiple of something like 10, which is rock-bottom. It’s like walking into Wal-Mart and finding a mink coat on sale for $23.99 and saying, “I don’t want to buy that because nobody else is.”

Jim: Please, Michael.

Mike: I mean it. Liz Claiborne is a mink coat someone left on the ready-to-wear rack. And Jim, if you’re basing your investment decision on what’s in or out of fashion on Wall Street, guess what? Those fashions change in an eye blink--just like hemlines.

Jim: But this has been going on for the last five to seven years! You might as well put your money in an index fund; you’ll be further ahead.

Mike: So when is the time to buy Liz Claiborne? When everyone else has awakened?

Jim: Look, I’m sure Warren Buffett is thinking the same as you are.

Mike: That’s quite a compliment to Warren.

Jim: He’s not going to wait until everybody catches fire with apparel stocks, he’s going to buy what he sees as a real strong value right now and wait it out. Good for him. He’s got his billions. But we’re not all Warren Buffett and we’d like to earn a return starting right now. In the next 12 months at least, Liz Claiborne--no matter how well it’s run--is not going to cut it for you.

Jim: Don’t buy; Mike: Buy

Colgate-Palmolive (CL)

Jim: Now here’s a stock that will make you happy, Mike, and I’ll tell you from the outset that I find Colgate-Palmolive to be magnificently run. The stock is a standout, and I wouldn’t hesitate for a second to buy the shares.

Mike: Good, we can both go home now. I absolutely agree with you. This stock is a stellar performer. It has growth year after year and great opportunities ahead in an overseas recovery, right?

Jim: Yes. But what amazes me about Colgate-Palmolive--as any of our readers will know if they have read about Procter & Gamble’s problems lately--is that it’s in one of the most fiercely competitive industries in the world: basically soaps, household products, foods.

Mike: Sure, and no matter how much money you might gain on Colgate-Palmolive stock, you’re going to give a hefty chunk of it back to Colgate-Palmolive, because look at the list of what these people make: Ajax and Palmolive cleansers, Colgate and Ultra Brite toothpastes, Irish Spring soap, Colgate shaving cream, pet food . . .

Jim: I know, the list goes on and on. And each product has a ton of rivals from the likes of Procter & Gamble, Clorox and Unilever. Yet Colgate-Palmolive thrives. Here’s just one example. A decade ago the company earned about a nickel per dollar of sales. Now it’s earning a dime. To double your profit margin, in an industry where the intense competition means constant price-cutting for market share, is a credit to Colgate-Palmolive CEO Reuben Mark and his crew.

Mike: Now, of course, things are looking up even more because the company’s overseas results are coming back, and the firm will ride that wave, too. A couple of years ago, during the Asian economic crisis, Colgate-Palmolive was among those multinationals faulted for being overly exposed overseas, but now that’s behind us.

Jim: This is the classic stock to buy when you want to sleep at night. Check this: In the last 12 months, it’s up another 21%. Now, it has fallen off so far this year with the broader market, but that makes it only more of a buy. And for the last five years, it has handily outperformed the S&P; 500.

Mike: And it’s looking for double-digit earnings growth again this year, on more than $9 billion in sales.

Jim: Right, and one reason Colgate-Palmolive pulls this off is because it’s great at developing and rolling out new products as well as newly improved products. It’s not just about taking a box of Ajax and slapping “new-and-improved” on it.

Mike: It’s not?

Jim: Colgate-Palmolive actually brings out new products. Like the Total brand of toothpaste, which is now one of the best-selling toothpastes in the country.

Mike: Even though it’s exactly the same as any other toothpaste on the counter?

Jim: That’s not the point. Another new product, Colgate Sensitive Maximum, which is yet another toothpaste, is also coming. So are about a dozen other new products this year. You can argue that they’re no different from other brands already on the supermarket shelves, but let’s face it, when it comes to soap and toothpaste and shaving cream, people are always looking for something new.

Mike: And, of course, you know Colgate-Palmolive will promote the heck out of those new items. All of which are reasons why this is a great company and a great stock.

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Jim: Buy; Mike: Buy

Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).