Weighing Options With Robert Olstein

As a person who is known for digging into the documents, could you have seen any way the individual investor could have spotted these shenanigans ?

I would say it would be nearly impossible. I saw Enron's collapse in advance. That was easy to me. I saw Worldcom's problems coming as well. But this escaped me because I never even thought of it.

Let's talk about stocks for a minute and get back to scandals later. What names do you currently like?

One stock in our fund which I'd like to talk about is Xerox (XRX Quote). Xerox is a company we identified early as paying down a lot of debt. Plus they have a good leader in [Chairman and CEO] Anne Mulcahy and great free cash flow.

The key to Xerox's success is that they transformed their business from black-and-white copiers to digitization and color. The margins are much higher now. And now the free cash flow yield is north of 10%. Now that the margins are higher, we think the free cash flow of this company is probably in the area of $1.25 a share. We think it is worth around $19 to $20, yet the market is focusing on the fact that there is excess depreciation instead of the tremendous transformation taking place.

How long have you owned Xerox? It's been stuck around $14 for nearly two years.

We've owned it since April 2005. Our average cost is $13.37, so we have not made too much money yet.

You mentioned that Xerox has a good leader in Anne Mulcahy. But I thought you don't usually look at management and just stick to watching the financials.?

You can judge a good leader by how they manage their finances. This was a problem company. They had a bad leader, they had bad accounting, and they had a huge debt load. But all of a sudden you see debt coming down and other good things. And you can see it in the financial statements.

We judge management via the financial statements. We pay attention to how they act, not what they say. We look to see if they are conservative and if they care about free cash flow.