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Herb Greenberg Interview on <I>KSDO</I>'s Wall Street Review

The transcript is unedited and phonetic spellings are indicated with a (ph). Wall Street Review recently interviewed Herb Greenberg. Wall Street Review can be heard Monday though Friday on KSDO.com and on KSDO AM 1130 in San Diego from 6 to 7 p.m. ET. Herb Greenberg, who writes Herb on the Street, spoke with Wall Street Review on Jan. 31, 2000.

Mike Green:

And welcome everybody, Monday edition of Wall Street Review. Mike Green and Jim Benham and today, folks, we're very happy to have with us Herb Greenberg, he's senior writer at

TheStreet.com

where he pens the

Herb on the Street

column. Herb how you doing today?

Herb Greenberg:

Okay, how you doing. Let's just say I'm as good as you can be sitting in New Jersey.

Jim Benham:

We should point out Herb is a -- are you a native Californian?

HG:

I'm a native Miamian but I spent 10 years in San Francisco.

JB:

Well Miami's the same kind of deal. That's where I first learned of you, Herb on there was that the

Insider

, was the name of that column?

HG:

Business Insider

in the

San Francisco Chronicle.

JB:

Business Insider, right, and you were also a TV star up there, I remember you were on

KTVU

from time to time.

HG:

Actually I was on

KRON

, the

NBC

affiliate, everyday every morning I was the business reporter.

JB:

Well now you're still on TV at

TheStreet.com

but we got to tell you, we've had a number of folks on this program but other than

Jim Cramer

, you are the first to have your picture on our mouse pad.

HG:

Oh really!

JB:

You're big enough to actually get your picture on the mouse pad unlike your counterparts

Lashinsky

and

Seymour.

HG:

That's true, that's true, Lashinsky doesn't wait for that. Adam's a great guy, Adam's a fabulous guy and so is Jim Seymour.

MG:

You know Herb I read your column religiously but for those who may not be familiar with your commentary, can't imagine they're out there, but how would you describe your mission at

TheStreet.com

?

HG:

My mission essentially Mike is to make people remember and actually have them respect the word risk. And I spend good deal of my time talking to short sellers. Very smart folks, who spend a lot and time betting against companies. And the reason I do that is because these people are often, they're looking at the numbers, they're looking at the fundamentals, they're not looking at the momentum of the stock and they're often there first to spot a problem. And when people get blindsided, you know, you could say these people saw it a head of time. So ideally I'm pointing out potential problems with lots of different companies. And also, you know, I point out things, I try to get there first so I'm also looking at things, at companies where talking to folks who like companies that nobody's paying attention to. So it's either value on the long side or value on the reverse, on the short side.

JB:

Yeah, I remember the fabulous work you did with

iOmega

(IOM)

. Where it was just story, after story, after story, on that soap opera.

MG:

And the iOmegans are a tough crowd.

HG:

The iOmegans are a tough crowd but hey I learn just learned about the THQites. That's the investors in

THQ

(THQI)

, which is a video game maker and there's the Anchorites, who invest in

Ancor Communications

(ANCR)

and we've got the Learner-hooligans, we've got so many because the Internet's made it so possible for so many people to communicate and they create this great community that essentially, actually I think is creating a major some what of a problem because I see a lot of libel on these boards and one day someone's going to go after the libel on these boards. And I hope it's me.

JB:

One of the things too, that you do is, like you said is, go after some of the bigger name companies too,

Dell

(DELL) - Get Report

computers,

Intel

(INTC) - Get Report

, not that you go after them --

HG:

Yeah, I don't go after them --

JB:

No, no, I want to rephrase that cause I don't want to characterize you as someone going after them but I will say is that of all the columnists on

TheStreet.com

, you're one of the only ones that will go ahead and launch into a couple paragraphs on accounting practices which usually we don't hear from the likes of Jim Cramer or the other folks. Why don't you talk a little bit about, and I know this came up over the weekend on the great TV show you have on

FOX

, you and Adam Lashinsky differ on the outlook of Dell computer, why don't you tell a little bit about why --

HG:

Adam Lashinsky came on the show to do predictions, we do predictions at the end where he has ah -- he said he thinks the stock will hit 70 before the end of the year. I came and said, you know I was talking to short sellers who were actually adding to their short positions two days ago or last week when Dell reported and they were doing that thinking the stock that it'll cover somewhere in the 20s and the reason they believed Dell is overpriced at these levels is because it's growth rate is stalled. I mean, the company's growth rate isn't what it used to be and they believe it should be re-priced and that this is no longer the growth company people thought it was.

MG:

Mike Dell

said as much himself, did he not?

HG:

Michael Dell mentioned some things but it was his CFO,

TheStreet Recommends

Tom Meredith

who basically said, hey, our growth isn't going to be there, going forward in the next quarter or two. The thing the bulls are looking for is that this is going to get renewed growth, you know later in the year with some really hot new products. And maybe that'll happen, but you still have a company where it appears the growth has slowed dramatically. Will they pull some rabbit out of the hat? Maybe, but you just need to know that there are very smart people spending a lot of money who are betting that will not be the case. Now, you should understand, these people who bet against these companies, they are often very early, they could be there a year early. And you know, you just have to understand though even with Dell, with anything that there is a risk and you don't pay attention to the risk, I'm telling you're gonna get slammed and if you're on margin, if you're buying stock on margin you can lose it all.

MG:

And even if you own the company or happen to like the company it's always good to read certain things that are negative. Every company has negatives and--

HG:

Mike, you need to look and ask yourself, "Who's on the other side of the trade?"

MG:

Yeah.

HG:

You know, "Why is someone betting against me and good investors will always look at the negatives and say all right these short sellers are raising some issues, how serious are these issues?" And if you don't do that, you're doing yourself a disservice. That's the way I look at it.

JB:

Now another one in this vein was Intel. And, of course, on the heels of their last earnings report and I got to congratulate

TheStreet.com

for your coverage of the big boa, the earnings--

HG:

Thank you.

JB:

I'm serious, I'm not just saying this, you guys do a great job. But you had a different take on Intel; the market went gaga over their earning report. The stock, I forget, was up $10-15 dollars or something on the news.

HG:

Don't remind me.

JB:

But all the things that you said again, this might be another one and it happened with

Lucent

(LU)

, where everyone ignored the news on Lucent although people like Bob Olstein and others were saying, "oh they're doing all these accounting hi-jinx", nobody cared until finally they had to come out and say we're out of stuff in our bag of tricks. What's going on with Intel that makes you a little concerned?

HG:

And let me say that when any stock we talk about I do not invest in stocks. I cannot invest in them, so I just want to preface anything that I do not have a position long or short in company that I talk about.

MG:

Okay, we're going to point out that we're owners of both Intel and Dell. So bring on the negative stuff.

HG:

The thing about Intel is that the company essentially made its quarter, came close to making its quarter by using the, basically by padding, by getting more gain from the sale of stocks, especially internet stocks. And the question with Intel, you can add Microsoft to the list is that these, this is not income from operations and if it's not income from operations should you really count it. And Jim Cramer and I have gone back and forth over this. We were almost wringing each other's necks over this a few weeks ago, because he believes you make a dollar the way you make a dollar and it doesn't matter how you make the dollar but if you look at it from a quality of earnings standpoint, that's not the quality you're looking for. And I'll tell you something, if Intel is making money everybody wants to look at Intel based on the investment gains they're making. Well if this market ever tanks then they're going to have to take those losses and they won't be able to say, "ah, but look over here their operations are doing so well."

JB:

Right, it is an earnings growth game and I guess if you're looking at just the earnings number and you're seeing that growth. And what you're saying is, if you're not recognizing that some of that growth is related to the biggest single gain ever in the Nasdaq over the course of a year, with some of these companies, that you're not doing your job as an investor are you?

HG:

No. You've got to ask yourself where are these earnings coming from. I mean look at what the professionals do, they're going after, they're looking at the tax rate, they're waiting till the 10Q comes out, and they're looking, really digging into the balance sheet to see really what account was up and what account was down and they're trying to figure out how they squeeze an extra penny or two out of the financials to make the earnings look better and that's when you talk to people like

Bob Wallstein

. He talks about quality of earnings and that's it in a nutshell. And that's why companies like Lucent and others get in trouble because when they start playing games with receivables and inventories you start often down the road, you end up with a charge or some other very nasty surprise.

MG:

Talk a little bit about this is a company you've covered many times and I remember I first noticed this company some time ago; simply a lot of people were talking about it, and that's Ancor Communications. I saw this thing rise from the single digits up to 40-41. It tanked; I think it got as low as a buck in the last year. Then it just recently beginning of December of '99, a few weeks ago hit as high as 94 1/8, today it's at 37 5/8. What's up with these guys?

HG:

Ancor, that's the one that's spelled a A-n-c-o-r, I say it should be spelled A-n-c-h-o-r. The company makes a fiber channel switch and it had some very good - the story is that it had some business with Sun and that it's really just going to explode and be a great company, however it only has a fraction of the market.

Brocane Communications

(sp) has the bulk of this market. And you have believers who think this company has got great earnings power.

JB:

It's a very culty stock.

HG:

Right now the company, just last week reported some very disappointing news. Earnings weren't where analysts had been expecting them. This is getting into the issue of substance over story or story over substance. Right now Ancor is a show me company. You have analysts who have actually now, including one of the firm's underwriters, they've pulled the plug on the company or that's my way of saying they've lowered their estimates, they've downgraded the stock, but yet on the message boards you have a bunch of believers.

MG:

Very culty stock, what do you call those guys, the Ancorettes?

HG:

The Ancorites.

MG:

Herb, you've covered this company and I think we know one of your sources is

David Tise

but Tyco International this guy really came under attack from every analyst who covered this stock on Wall Street but what was the crux of his argument about Tyco International and the accounting?

HG:

Well, you know earlier Mike where he sort of got this thing going it was about merger accounting because Tyco is basically a roll-up, buying a bunch of other companies. But what I wrote about today was that he raised some issues he just raised some questions on whether there are some IRS-related issues because Tyco has disclosed that it might have some discrepancies which a lot of companies do. There's nothing in that by itself that should be an issue but it also has a number of similarities to another company called

Lavlon Incorporated

which did come over IRS scrutiny and in the end had to pay several hundred million dollars in back taxes and penalties. But now he's raising that issue, I talked to Tyco today, Tyco told me that they don't put any faith in anything Tise says and this saga, as I consider it, continues to roll on. But this is a classic case - I have to tell you because I've been framed royally today for writing this column about Tyco all I'm doing is pointing out what a lot of smart people are pointing out to me. You can't just dismiss it out of hand because too many companies have told you, "Hey, I got no problem." You've got to go read, let me tell you guys this, you've got to go read

Chainsaw

, it's the book about

Al Dunlap

and if you haven't read this book, everybody reading it, you read this book, read it closely and you'll come back and often wonder if you can believe anything any company tells you after you read that book.

MG:

You know and the situation too with just roll-ups whether it is Tyco or anybody else, roll-up in general the accounting get weird, good will and things like that, I mean a lot of things are put on a positive spin and the numbers can really be moved around.

HG:

The problem with roll-ups is that after you stop rolling them up you have nothing to roll up anymore, the earnings growth isn't going to be there. Look at Stuart Enterprises, the funeral home company, look at

Service International

, all these funeral home companies, they were all rolling up a bunch of funeral home companies and in the end they were all having their own funeral.

JB:

Now why would you, and you know a lot of secret sources of course, and in the case of David Tise, he's obviously all over the columns and most of the ones you've written about Tyco you've had his name in there.

HG:

I've only written a few about Tyco but go on.

JB:

Is Tise because he kind of came up with this statement and you said, "Hey I'm interested in this, I want to write about it' so you can use his name versus I think you have a pretty detailed and intricate web of sources though."

HG:

I have a great web of sources but most people who short stocks don't want to be quoted because it's not worth the grief, so my readers, I figure know that I have a pretty good web of sources. I have to tell you, I talked to some of the smartest hedge funds and short sellers in the country and you got to go head to head with some of these guys to see the level of intelligence and research they're we're working with and we're dealing with here and I got by the track record of my source. David Tise was one of the first people to put out a very detailed report and start talking to me and I suspect others about funding long before anyone wanted to talk about problems in funding. Does that mean he's going to be right on Tyco? I don't have a clue but he certainly isn't a crackpot but anybody who says anything negative is considered a crackpot, but what do they say about all these analysts who say stocks are going to rise and then the stocks don't rise, does anyone ever take them to task? Who's held accountable here? These are issues people don't want to deal with.

MG:

Or the stock rises to $150 like they said it would and then they say, "Oh I guessed too low, make it $300".

HG:

Well, that's the game of the street. It is a game. It's a sport and that's something we at

TheStreet.com

like, we like the sport of this.

JB:

Well, we're big fans.

HG:

Hey thanks a lot, guys.

MG:

Hey Herb, keep up the great work. We'll talk to you again soon.

HG:

No problem, give me a call another time.