Q&A: Finding Value With Robert Olstein

So they were reporting earnings of $1 a share, but they really had more like $1.40 of free cash flow. Once the market recognizes things like that, prices tend to adjust upward. We're actually seeing a lot of companies with excess depreciation now, as a result of the capital-spending boom from 1995 to 2000.

We've had good success in the past few years in companies like Disney, McDonald's (MCD Quote) and Home Depot (HD Quote) when management, interestingly enough, came out and said they were going to grow less.

We own a position in Cisco(CSCO Quote) now, which we think is worth $22 a share. It recently got blasted down to what we paid for it, around $17, because the company said they were not going to be able to grow 10% a year. [CSCO now trades at $17.74.] The people expecting growth of 15% beat the stock down to where it's selling at 16-17 times earnings. With companies like this, when expectations become realistic and the market says Cisco is worth $22-$23 a share even at 5% growth, you can make some nice money. Unfortunately these aren't usually doubles but 30%-40% gainers.

How important to you is a dialogue with management?

We care a lot more about what management is doing, which is very well documented, than what they are saying. I can learn everything I need to know about management by looking at the numbers. I can see how conservative they are. I can compare three years of shareholder letters and see if they are discussing problems openly and addressing them. If a company isn't discussing any problems, I don't believe what they're saying. I can see if disclosure is complete and easy to understand. If I have to call to get something important explained, there's something wrong.

In 38 years in this business, I have yet to hear management warn of an existing problem that, if not resolved, would result in a dramatic drop in the share price. That's exactly what I care about.