Taking On Readers' Stock Questions

As I mentioned in last Friday's column, I enjoy my email dialogue with RealMoney readers. As promised, I'm following up that inaugural Q&A session today -- this time, with a theme of specific stocks. Many of you wrote in with great questions about interesting companies, so I've chosen the best of the bunch to address here in this format.

Although you'll see that I've been quite candid in my assessments of these companies and stocks, please remember to do your own research and/or consult a professional investment adviser who's familiar with your risk tolerance and financial situation. Also, emails may be edited for style and clarity when they appear in this column.

---

Question: Can I get your opinion of Advanced Fibre Communications (AFCI - commentary - Cramer's Take)?

-- R.H.

Answer: Of the telecom-equipment companies that I've reviewed, this one is in particularly good shape. It's not losing money, and it has enormous cash and liquid reserves: On a net basis, liquid assets cover almost two-thirds of the market capitalization. So at least Advanced Fibre's shareholders own something of value, which I don't think is the case for equity holders in Lucent (LU - commentary - Cramer's Take). If I were interested in investing in the telecom sector, I'd consider this stock at the current quote.

Question: I own Caterpillar (CAT - commentary - Cramer's Take) and Veritas (VRTS - commentary - Cramer's Take). Can you address these two?

-- P.S.

Answer: I'd consider selling Caterpillar at these levels. It's hard for me to imagine this stock going a lot higher. The company has made its numbers on a combination of a strong cycle, cost cuts and a weak dollar. For example, it reported quarterly earnings Thursday of $1.15 per share, easily beating the 66-cent consensus estimate, but 13 cents of its earnings performance was related to currency translations. Furthermore, much of the recent increase in sales was attributable to deliveries to dealer rental operations, which were up 25% over the year-ago period. This is arguably a satisfaction of pent-up demand to refurbish older rental fleets; it doesn't represent sustainable quarter-over-quarter type of growth. Caterpillar is what a full-priced stock looks like: All of the good news is priced in, and then some.

I don't like Veritas for a number reasons; the most obvious is that it's very overvalued. As a simple matter of principle, though, I'm not interested in allocating capital to a company that is aggressively transferring shareholder property to employees through an excessive stock option program. Last year, for example, Veritas granted options equaling 6.2% of shares outstanding. I don't think the long-term equity returns are high enough to justify shareholders paying this level of cost. Veritas is a relatively mature $12 billion company, not some start-up.

Question: Have you ever looked at Bombay (BBA - commentary - Cramer's Take)? It has strong same-store sales.

-- G.F.

Answer: You're right, Bombay has turned in a few quarters of impressive same-store-sales growth, nearly 30% in the first quarter. But this is off a low base. Even if its net margins double to 3% (a big if!), its current valuation of $400 million suggests a price-to-earnings ratio north of 20. That's too high for a company that returns less than 10% on capital. Also, Bombay management is not a friend to shareholders: They loaded up on options when the stock was trading below book value. Last year, $6.5 million of shareholder wealth was transferred to management via options.

Question: I'm holding Pfizer (PFE - commentary - Cramer's Take), and I saw you highlighted Bristol-Myers Squibb (BMY - commentary - Cramer's Take) as a keeper for the long haul. I see the dividend yield is much better with Bristol-Myers, but are there other good reasons to select it over Pfizer?

-- S.C.

Answer: I don't have any problem with Pfizer, specifically. It's a great company with strong management, an impressive pipeline and a terrific balance sheet. The dividend is only 1.75%, as you say, vs. Bristol-Myers' 4.1% yield. When it comes to allocating capital to equities, it's all about price. According to my calculations, Bristol-Myers is much more undervalued than Pfizer both on a current and prospective basis.

---

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. At time of publication, Alsin and/or ACM was long Bristol-Myers Squibb, Ethan Allen and Hasbro, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, The Turnaround Report.