The TSC Streetside Chat: Value Investor Charles Crane

Value investor Charles Crane has seen some cheap stocks in his day.

Crane started out on Wall Street on the buy side, working for Oppenheimer and Prudential Bache. As an advertising industry analyst, he was on Institutional Investor's All-American Research Team from 1985 to 1988.

From there he went on to work as director of research at asset manager Spears Benzak Salomon & Farrell, a division of Key Asset Management. He's now strategist at Key's Victory SBSF Capital Management, which oversees $4 billion in assets.

Value-oriented, though willing to take a chance on growth, Crane doesn't see stocks as particularly cheap now but thinks there are issues worth buying. We chatted with him to find out what they are.

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TheStreet.com: How are you approaching this market these days?

Charles Crane: With a degree of cautious optimism. We believe that earnings are going to rebound handsomely in 2002 and that the momentum will carry through to 2003, though not to the same extent. Much of that good news, at least in the short run, appears to be reflected in stock prices. Compared to prevailing interest rates, share prices in general seem fully valued.

TheStreet.com: What areas do you consider expensive these days?

Charles Crane: The areas that we are most underweight are the most cyclical elements of the market, such as basic industries and capital goods. We are also underweight in the financial sector, not so much because the stocks are expensive in absolute multiple terms, but because the shares do not do so well when interest rates are rising. We're underweight the technology sector, where good value is hard to find.

TheStreet.com: So are you focusing more on consumer staple names?

Charles Crane: We have a fairly healthy representation in consumer staples and cyclicals. More the latter than the former. We have a pretty healthy weighting in energy, communications, health care. That pretty much rounds out the list.

TheStreet.com: It almost seems like a hedge between economic strength and weakness, with focus more on the consumer than on capital spending.

Charles Crane: That's one way to interpret it. The other way is to say we're leery of the valuations being ascribed to the rustier companies out there. Some of these stocks could suffer a setback if first-quarter earnings, in particular, are disappointing.

TheStreet.com: What do you make of some of the recent accounting issues? Not just outright fraud, but this debate we've seen lately between GAAP [generally accepted accounting principles] earnings and pro forma earnings?

Charles Crane: The vast majority of the companies we follow and own don't have anything to pro forma. They're fairly straightforward companies; they're not technology companies that play all the accounting games you're referring to. Not to say that other companies don't do those sorts of tricks. But they're concentrated in the technology sector where managers seem to have a rather heavy hand in excluding what they feel like they ought to exclude in order to make the numbers better.

TheStreet.com: What companies are you looking at as being good values here?

Charles Crane: Well, the newest name, which we added at the beginning of this week, is Hewlett-Packard(HWP Quote).

TheStreet.com: How come?

Charles Crane: I'm agnostic on how the deal breaks if the stock price is low enough, and the stock price is low enough. With a share price under $20, I think I have a reasonable risk/reward regardless of whether the Compaq(CPQ Quote) deal comes in. I think I have a risk to $15 and upside to $27 or $28 in the next 12 months. '...we're leery of the valuations being ascribed to the rustier companies out there.'

TheStreet.com: When you value that, are you looking at it on a relative basis compared to, say, Dell(DELL Quote)?

Charles Crane: No. Hewlett doesn't need to be compared to Dell to make it look inexpensive. One needs to check historical precedent in valuing something like a Hewlett-Packard. Admittedly, the composition of its business changes over time, but you have a company trading at a multiple of sales that has rarely been seen at a time when you could argue that margins are depressed. Will they get back to where they were in 2000? No. But they don't have to for a fairly impressive rebound in earnings to happen at this company. Again, regardless of whether they have Compaq in their fold or not.

TheStreet.com: Are you involved in any of these companies that have been beaten up on accounting concerns?

Charles Crane: Oh yeah. WorldCom(WCOM Quote) is a holding of ours that has been troubled both because of concerns about its fundamental health and accounting concerns and other nonfundamental issues, such as the loan to its chairman. We bought more stock a month ago on the first break in its shares and have held on since then.

AOL Time Warner(AOL Quote) is another one that seems to pop into the headlines every week on one concern or another. If you look at the list of things people are anxious about -- off balance sheet financing, high use of options, growth through acquisitions -- you could put a checkmark next to AOL on all three of those counts. So even though the fundamental health of its business portfolio is satisfactory and likely to get better as the economy recovers, you have a stock that's operating under a cloud.

TheStreet.com: It seems lately that bondholders have been more of a force in the market. We saw this with Tyco(TYC Quote) and its plans to break up, which some people ascribe to bondholders worrying about whether they were going to get paid. And now we have Bill Gross coming out and complaining about General Electric (GE Quote). How do you see that shaking out?

Charles Crane: The notion that bondholders are becoming more visible in terms of their analyses and proclamations -- that's probably healthy. They are senior to equity holders in the capital structure. My only concern is that bondholders rattle their sabers with no regard for equity holders. They're not all that concerned about whether making some sort of derogatory remark will paste the equity holders.