A Lesson From GM on What <I>Not</I> to Do in the Wake of Bad News

Also, more on Waste Management, insider selling and other garbage.
Publish date:

From the "This Is Old News, but Use This as a Lesson" department:

During last Thursday's rehearsal for


new show, which premieres this Saturday on the

FOX News Channel

, Bob Olstein of the

Financial Alert Fund

was getting drilled by




. (For more info on the show, click to the


on Fox link to the left.)

One of his top picks was down-and-out


(MAT) - Get Report

. (Check out JJC's post-rehearsal

column on


stock.) Another was

General Motors

(GM) - Get Report

, which he raved about largely because of its stellar balance sheet, which is flush with cash.

Cash? Ha! If Olstein had only been with us at


rehearsal after GM was slapped with that $4.9 billion product liability judgment! Here's a guy who owns 71,500 GM shares, and one of his faves gets financially body-slammed by the courts.

How did he react when heard the news? What would he have done? Would he have been thinking about selling his shares the first thing Monday morning?

Now we know that that kind of knee-jerk reaction, which many investors had in after-market trading, would've been flat-out


. GM rose 2 9/16 yesterday, as investors appeared to discount the news and the threat of future litigation. (Just as



Katie Hobson

suspected during the rehearsal, by the way, and contrary to what JJC expected!)

But that doesn't mean Olstein dismissed it, la-dee-dah, when he first heard about it. He reacted the way he does whenever one of his holdings gets hit with bad news: "First, the pit goes into my stomach," he says. And for good reason. "A great analogy is

Johnson & Johnson

(JNJ) - Get Report

, when all of the sudden someone laces


with cyanide, and it may have been no big deal (to the company's fundamentals), but it took the stock a couple of years to recover."

Still, events like the GM judgment or the J&J fiasco are examples of why Olstein doesn't generally put more than 2% or 2.5% of his portfolio into any one stock. "There


such a thing as human nature and bad luck," he says. "You can analyze everything in the world but no matter how well you analyze it, some court can give somebody $5 billion and everybody will blow it out of proportion."

In the case of GM, he went back and re-analyzed his original analysis. And that's when Olstein stopped worrying, headed to a


game and remembered why he bought the stock. If GM eventually is forced to pay the full amount, after an appeal, doing so wouldn't break its bank. The company has $6 billion of net cash (cash minus debt) and it generates $4 billion in free cash flow annually.

That's enough, even with the full judgment, for the company to take itself private in 10 years. (Olstein doesn't think it will, but it serves his point: Even with the judgment, cash isn't one of GM's problems.) He also expects the company eventually to spin off its

Hughes Electronics


unit, netting GM shareholders a stock he believes would be worth something in the neighborhood of $18 per share.

Armed with that analysis, Olstein doesn't want to repeat the mistake he made earlier in his career when he bailed out of


(PFE) - Get Report

after it was hit with what appeared to be a damaging lawsuit. He sold on the news and the stock never got as cheap again!

Garbage Talk

An item here

yesterday quoted George Muzea, of

Muzea Insider Consulting

, as downplaying the recent mass sale of stock by

Waste Management




the company warned of lousy earnings. Among the reasons: Director Ralph Whitworth bought 686,000 shares in September 1998, increasing his holdings to 1,186,000 shares, and has not sold a share. Muzea was quoted as saying, "Wouldn't it be logical for a director with this much stock to know if bad news was coming?"

To which reader

David Brail

writes: "Misses an essential point. Whitworth is an outside director, far removed from the daily business of WMI. The insider sellers were MANAGEMENT, in the fray every day, and privy to the conditions leading to the shortfall."

Good point, and I'd like to get Muzea's response; couldn't get ahold of him. When I do, I'll pass it along.

Speaking of the Waste Management item:


Tom Grimes

, reacting to my comment that I felt compelled to write about the insider sales because it was news, says he's at a loss to understand why knowing that Waste Management insiders had dumped their shares before the bad news "is timely news that 'pays.' It's very interesting, and if they did it illegally, they should be punished, but the big scoop did nothing for me as an investor."

Maybe not, but I write a news column, not an investment advice column. Sitting on news just because it's not tradable doesn't work for me. It's all part of the process of knowing what you own, and based on everything I know, investors ought to be interested in


news affecting their investments. You never can tell when it turns out to be the missing piece to the puzzle.

While on the topic of garbage:




brouhaha included a steady stream of emails from one sicko whose emails went, shall we say, over the line. Sent them to his Internet service provider. Not only did the ISP threaten to yank his connection if he continued with the emails, but it told the emailer it would help with the prosecution. Let that serve as a warning: We really are


serious about going after unruly members of the online mob.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg also writes a monthly column for Fortune.