Weighing Options With Robert Olstein

Hey home-gamers, don't beat yourself up for missing the options-backdating scandal. Even renowned stock sleuth Robert Olstein says it was nearly impossible to spot.

The recently unearthed scandal, which has revived Main Street's skepticism into corporate accounting practices, centers on how certain companies priced options granted to their executives. And despite all the sharp pencils wielded by Wall Street's analyst community, it took an associate professor of finance at the University of Iowa named Erik Lie to uncover it.

Employee stock options typically carry a strike price equivalent to the market price of the stock on the day they are granted. But more than a dozen companies so far have been identified as having suspiciously granted options on what turned out to be their stock's near-term or 52-week low. The accusation is that the companies set the strike price for the options after they were actually granted so as to take advantage of low prices, which yield a greater payout if the market value goes up.

Olstein, portfolio manager for the $1.7 billion (OFALX Quote)Olstein Financial Alert fund and a well-known digger into financial documents, explained to the TheStreet.com why even the savviest investor would have missed corporate America's latest disgrace. He threw in a few of his favorite stock picks as well.

TheStreet.com: What is your take on the recent scandal regarding companies backdating options? To the retail investor it seems like another example that the game is rigged in favor of the privileged few.

Robert Olstein: This was a shock even to me. I never looked at this stuff. It escaped me to look at where option prices were during the year. We add back option expenses into our cash flow because it is not a cash flow item. When we value a company, we look into the dilutive effect of the options, but we add back the fictitious expense that goes on the books.

How prevalent do you think this problem is? Should investors be worried about it?

I think this is simply a case of a bunch of people with bad judgment. I don't think it's prevalent; maybe it happened in 20 or 30 companies.

It's similar to the stock market timing scandal in the mutual fund industry. A few firms broke the rules, but there are 5,000 funds out there. I don't think it's widespread and I would like to think there are people out there who have better judgment.