July 24,25: Guest Robert Friedman

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Participants on July 24 included host Brenda Buttner, Jim Cramer, Herb Greenberg, Dan Colarusso and guest Robert Friedman. The transcript is unedited and phonetic spellings are indicated with a (ph).

BUTTNER:

Hi, everyone I'm Brenda Buttner and you are connected to "TheStreet.com". We're here to help you make your own decisions about investing. It's time now for Stock Drill.

Our guest stock picker is Robert Friedman, the chief investment officer for the Mutual Series Funds. All six of those funds are beating the S&P this year. His firm has positions In the stocks we will be talking about today. They are General Motors, BankOne and J.C. Penny.

Also with us from TheStreet.com Jim Cramer and Herb Greenberg. Gentlemen, thanks so much for joining us.

FRIEDMAN:

Thank you for having me.

BUTTNER:

All right, first up GM, the world's number one automaker. Why do you like it?

FRIEDMAN:

GM has been one of the worst run auto businesses in the world, but you have a $65.00 stock. You have $28.00 worth of their GM Hughes (ph) stake. You have another $3.00 worth of their stakes in Kawasaki and Suzuki. You back those out. You get the stock at $35.00. That $35.00 is earning $8.50.

CRAMER:

All right you talk about earnings. Great earnings last week for this company.

FRIEDMAN:

Yes.

CRAMER:

Just one small problem -- the North American sales, not doing so well especially relative to Ford and Daimler Chrysler.

BUTTNER:

And also margins. Margins are a big issue.

FRIEDMAN:

Absolutely. Daimler Chrysler started 10 years ago cleaning up their act. GM started five years ago cleaning up their act. GM is starting -- pardon me, Ford started five years ago. GM is starting today and that's why you have tremendous leverage on the upside and you're paying four times the...

CRAMER:

Starting today? Wait a minute they started before ...

BUTTNER:

Rob ...

CRAMER:

... the ...

GREENBERG:

Auto stocks sell in large part on inventories. GM has too much inventory. To sell that they've got to slash the prices of their trucks. Where's the profitability then?

FRIEDMAN:

Right now you get the company at four times earnings. So your downside is negligible.

GREENBERG:

Are you sure about that earnings level?

FRIEDMAN:

Pretty comfortable with that. They know that they have a problem on the small car side. They are addressing that issue. They have free -- pardon me -- they have free cash flow. They're in a position now to buy back a tremendous amount of stock. So inventory is one issue but the ability to buy back their own stock is a key to making money in this kind of...

CRAMER:

Are they smart enough?

BUTTNER:

But the rebates and discounts -- those are a big issue because they're making it up with higher volume and lower costs. But how long can they keep that up?

FRIEDMAN:

In the short term those kind of disastrous situations are our bread and butter. We love this type of disasters. We love short term earnings blips. There is nothing that would make us happier than have this company report disappointing numbers for the next couple of quarters and that gives us more...

BUTTNER:

Spoken like a true value investor...

FRIEDMAN:

.... of an opportunity.

BUTTNER:

OK, stock two BankOne, the nation's fifth largest bank.

FRIEDMAN:

BankOne is Ray Garea's (ph) closest Internet play he says...

(LAUGHTER)

.... he's one of our portfolio managers. With BankOne you've got about $4.50 of earnings for next year. A third of that is their credit card business First USA. They're the lost cost producer of credit cards in the country. Their access to the Internet to sell their credit cards has enormous opportunity going forward. The most mediocre credit card companies trade a 23 times earnings. If you spun this one out at even 20 times earnings at a discount even though it's a superior business, you get the core bank at nine times earnings.

CRAMER:

Rob, that's not what people are paying for here. People are interested in this Internet bank. Can we talk about it for a second because I've got grave questions about it?

FRIEDMAN:

Sure.

CRAMER:

Very difficult to have under one roof a .com and a regular bank. Isn't it true if you go to their wingsnet.com bank everything is cheaper than at the regular bank. No fees for half the stuff that they charge you fees for at BankOne. Why stay at Bank One if you can go to their .com?

FRIEDMAN:

If you have a regional bank that you can create at nine times earnings and that regional bank has just had a huge merger with First Chicago and they're just beginning to bring out the cost savings of that merger, you're going to make money whether it's the Internet side, whether it's the credit card side, or whether it's the regional bank side.

Also their head of corporate lending resigned this past week which I think is a huge signal that they will probably walk away from a low margin business. So while they lose some marginally Internet...

CRAMER:

Do you think it can also be a move ...

FRIEDMAN:

.... but they ...

CRAMER:

.... but could it be a huge signal that something is wrong? I remember in the first quarter they had a big whip up in non-performance.

FRIEDMAN:

There's nothing wrong with it. I think everyone knows that corporate lending is not the world's strongest business. I think they would much rather tackle the retail end and the mid...

GREENBERG:

Wait a minute when you talk about non-performers and that gets me into credit cards and they're vying with CitiCorp as one of the credit card companies still. The potential problems with credit cards, especially if interest rates start rising, and then the potential for delinquencies.

FRIEDMAN:

They have the cleanest book of credit cards in the country. But at the Mutual Series Funds, we do deal in bankruptcies and distressed securities, and that could offer a huge opportunity in the world out there, not from BankOne but from other credit card issuers, that have less quality to them.

BUTTNER:

I mean, everybody knows J.C. Penny's, but should they own the stock?

FRIEDMAN:

Should they own the stock? J.C. Penney's is a very simple situation. You have one of the most mediocre run department store companies in the country.

BUTTNER:

At least you admit it. (LAUGHTER)

GREENBERG:

How much do you buy of the ones you like?

(LAUGHTER)

FRIEDMAN:

Disasters are our bread and butter. Now they just hired someone out of Wal-mart to come and clean up the department store business but they control Eckert Drugs. They're going to issue stock in Eckert Drugs at the end of this year.

GREENBERG:

(OFF-MIKE) tracking stock, Jim.

FRIEDMAN:

I know you love tracking stock, but in this case it's a little different. Eckert is a superior business. It's one of the best drug store chains in the country. And they have a direct marketing business which is worth about six to eight bucks a shot.

GREENBERG:

But you still have this department store company that seems squeezed between Nordstrom and Macy's over here and Target over here. I was in one the other day, one of the largest shopping centers in the country, in New Jersey, and I walked in the men's department. The clerks were standing around looking bored. And right in the middle of all the shirts were tools for cars, and I was wondering what is this company doing.

CRAMER:

Good placement.

(LAUGHTER)

GREENBERG:

That's placement alright. Is this Sears or Penny's?

FRIEDMAN:

But in this situation, you back out those other assets. You're giving the credit card business (OFF-MIKE).

(LAUGHTER)

GREENBERG:

Do you go there? Like Peter Lynch, I want to know, do you go to J.C. Penney's first?

FRIEDMAN:

I never shop. I send my wife out to shop for me because I can't do it.

(LAUGHTER)

BUTTNER:

Oh, I don't like to hear this. Alright, OK.

FRIEDMAN:

She knows I look terrible otherwise.

BUTTNER:

Gentlemen, thank you so much. Robert Friedman from the Mutual Series Funds. Thanks for doing this Drill.

FRIEDMAN:

Thanks for having me.

BUTTNER:

Herb and Jim, we'll see you later in the show. But right after this, Microsoft is worth more than any company in the world so why does one trader think the stock is taking a fall? We'll find out when THESTREET.COM returns.

(COMMERCIAL BREAK)

BUTTNER:

Welcome back. Earnings surprise? Who cares. Profit outlook? Doesn't matter. At least that's the word from some investors who think the chart tells all. They simply look at graphs of the stock's performance when deciding to buy or sell. Well, meet the Street's chart man. He also known as Gary B. Smith. He trades for a living from his home using the charting method. And Gary joins us from Washington, D.C. and with us as well in San Francisco our silicon valley columnist, Adam Lashinsky who reports on companies on a more fundamental level.

Guys, thanks so much for joining us.

SMITH:

Howdy Brenda.

LASHINSKY:

Hi, Brenda.

BUTTNER:

Alright, Gary. Take on Bill Gates.

SMITH:

Oh, Microsoft. Brenda, wait one second. Did you hear that sound? That loud cracking sound. That's the sound a stock makes when it's broken. And there are no stocks more broken right now than Microsoft. If you take a look at the chart, when that upward trend line was broke to the downside, that was it for Microsoft. The party's over. Good-bye Bill Gates. Good-bye Steve Baumer (ph). That's it.

In fact, I'll give you some coming attractions. Here's what you're going to hear. You're going to see dead cat bounces, you're going to see lame rallies. Microsoft is gone for the time being.

BUTTNER:

That's why we like our chart man. He's not afraid to take on the most valuable company in the world. Alright, Adam. What do you have to say? Do you hear that same noise?

LASHINSKY:

Brenda, I can't hear it try as I may.

(LAUGHTER)

I just got back from Seattle last week at Microsoft's annual analyst's day. There's two reasons why the stock is hurting. One is because Microsoft does everything that it can to make the stock hurt. They try to tell people that things aren't good. That's not so surprising. People think they're a monopoly. They're also in the middle of a product transition and they've got some accounting issues that are confusing people.

Here's why Microsoft is going to be just fine. It's still the most powerful company on earth. They do have Windows 2000 coming out soon. It's very likely they're going to do a tracking stock. That's a stock that will be tied only to their internet stocks. It could have as much as $50 billion in value. And finally, Gary, do you really want to bet against Bill?

BUTTNER:

But Adam, actually the Internet has been giving even Bill some problems.

LASHINSKY:

The Internet has been giving problems to Microsoft. What's so interesting, they can be two years behind and then they just come charging back. Last week they introduced a new messenger service -- looks just like AOL's Instant Messenger. They're introducing a new search service -- looks just like Yahoo. They're getting into communities -- looks just like Geo-cities which Yahoo bought.

SMITH:

Adam, I don't want to bet against Microsoft, but why not wait until the stock goes down and gets rid of all this negativity that you say is built into the stock price right now? Why not buy it when it at least shows some signs of strength. That would be my point.

BUTTNER:

Adam, very quickly. Microsoft has a new mission statement. They say they're moving away from PCs and onto the Internet.

LASHINSKY:

Yes, the fact that this got so much publicity is a good example, Brenda, of when reporters go to a city and then they have to write a story about it. Microsoft has been moving in this direction, not away from PCs but away from putting on software and just about any other device for at least two years now. They reiterated that last week.

BUTTNER:

Alright, next stock, At Home. Gary, your chart really talks on this one, doesn't it?

SMITH:

Yes it does. Let me paint a scenario for you. Say you're sitting around and it's July of this year. And you've made a ton of money, like Adam has, for example...

(LAUGHTER)

... you've made a ton of money and you're thinking, hmm, I need some tax write offs. You know what I would do? I would go out and buy At Home, is what I would do. Because as soon as you buy the stock, it's just going to keep going down further and you're going to have some nice tax write- offs by the end of the year.

I'll tell you what. I love AtHome. AtHome will probably give you all this fundamental mumbo-jumbo. I like AtHome too. I used to use it when I was up in Connecticut. This is like Microsoft. I'd at least wait until it pokes its head out of its coffin right now.

BUTTNER:

Boy, I wish we had some strong opinions on that Gary. Alright, Adam what do you say?

LASHINSKY:

Gary, remember this is about our viewers and our readers, not about you or me. AtHome is going to have an analyst's day on Tuesday in California. Analysts always get excited when the company brings them together for this. They're going to hit a million subscribers by the end of the year and this is broad band, broad band, broad band. If you keep waiting, you might miss the up side, Gary.

SMITH:

Well, it ...

BUTTNER:

Gary B. and Adam, good stuff. Thanks so much for joining us.

LASHINSKY:

Thank you, Brenda.

BUTTNER:

And right after this, you like it when those big brown UPS trucks pull up to your house with a delivery. Well, soon you may be able to own part of those trucks. UPS is going public and we'll find out the word on the street when TheStreet.com returns.

(COMMERCIAL BREAK)

BUTTNER:

We all want the word on the street, so let's get it. From "TheStreet.com", Jim Cramer and Herb Greenberg. Also joining us, TheStreet.com news editor,

Dan Colarusso

. Guys thanks for being here.

Well those numbers that we saw when we got back from commercial weren't very pretty. The bears really ruled on Wall Street. But the NASDAQ felt the most pain. It was down about six percent for the week with huge drops on Tuesday and Thursday. Jim, what happens next week?

CRAMER:

I think we saw most of the correction last week. I felt like toward the end of the week, it had run its course. We began to see some of the better Tech stocks working better. I thought that was an opportunity to buy. I think that we're not going to come right out of this, but it looks okay. We have a lot of Tech wrecks, and now I think it's time to pick among the wreckage.

GREENBERG:

I think AOL, we saw a lot of put buying in AOL today. Maybe that's a contrary indicator that we hit the bottom. We don't know. There's a lot of put buying on all the Techs in the option and that's usually a sign that the concern is enough to move it back.

BUTTNER:

Jargon police. Put buying: explain that to our viewers.

CRAMER:

Options where you profit from a decline in the stock price.

COLARUSSO:

Well, you know you've got the situation coming up next week which could be just the opposite of last week and that is you've got Greenspan again. And my guess is it's going to be a big yawner because I mean, he's done the damage. And the damage is a media circus.

CRAMER:

Dan's right. There was a lot of negativity by the end of the week and that's why. And when I hear put buying, what that says to me is it's late in the game already. You've got to start buying them. Don't sell them. You should have sold them already.

BUTTNER:

You know Jim, you always say follow the supplier. Now Microsoft is shifting its strategy toward the Internet. Who -- what are the good plays based on that?

CRAMER:

You know I hate to say it but I think that no one wins when you play with Microsoft other than Microsoft. I am low on Microsoft. I think if this is another strategy for them to be able to get more money out of their products. I have looked at the little plays that are involved in this and I'm not going to put my name on any of them.

BUTTNER:

You know I understood Amazon this week, but I didn't AOL, IBM. What's going on there?

GREENBERG:

AOL didn't have the subscriber growth that some people wanted. I thought it was an opportunity. I did some buying.

IBM...

(LAUGHTER)

.... it was a great quarter. I mean what does the Street want.

BUTTNER:

Exactly.

CRAMER:

Just creep, it's not creek, you know, you're...

GREENBERG:

It was. There were people who just said it ran too much. But all of my focus this week was let's separate the good from the bad. IBM had a good quarter. AOL had a good quarter.

COLARUSSO:

Amazon?

CRAMER:

Hey, listen I'm not long (ph) on Amazon.

I thought that quarter was awful. That guy it not even on the scene. He's not even playing capitalism.

COLARUSSO:

He's got a great business.

BUTTNER:

Another tech stock for our next topic. Compaq hired a new CEO from within after some high profile prospects snubbed the company. Should investors also avoid the stock?

Well, judging from the chart it looks like some already have. Herb, what do you think.

GREENBERG:

What a big yawner this disappointment was. My goodness. You know everybody is waiting for some big deal like Hewlett Packard where they name someone high profile, and they this company comes from -- with somebody from inside. One of our reporters wrote that according to one of his sources on the board at this company, the board had a 90 percent -- only 90 percent approval of this new guy.

So, the question is what does it mean? Part of me, I have to tell you, says I want to say this is bad news because it's not a high profile guy but the other part of me says you know, really if he executes, he's an operating guy. If he executes this could actually end up being up all right, though...

CRAMER:

Execution is going to be tough...

GREENBERG:

.... execution is going to be tough. Plus the industry is in such tough quandary, I want to know what this company's business model is going to be.

COLARUSSO:

Well, if they go...

BUTTNER:

But you know who cares...

COLARUSSO:

But if they go direct, I mean, they really have to message the resalers they have now. They just can't jump to direct. They need to maintain some market share, give themselves a little cushion for when they want to go out direct.

CRAMER:

But what a difference. Hewlett Packard names a very high profile woman -- Carly Fiorina -- from Hewlett Packard, stock goes crazy.

This guy, this guy was worth two points to the downside. I mean, you know, come on.

BUTTNER:

Who cares that he's not a high profile guy? I will tell you the shareholders at Sunbeam wish they hadn't had a high profile guy from the outside. I mean...

CRAMER:

Well, you know...

BUTTNER:

... he could -- give the guy a break. He's been on the job for two days already.

GREENBERG:

But nobody wanted this job and in the end the buck is going to stop with Ben Rosen and this time -- who is the chairman of this company and in the end if this company doesn't do well, finally Ben Rosen will be the guy who will be standing up. And who's going to kick Ben Rosen out?

CRAMER:

My partner wanted to buy Dell on this news. And I said is good news for everybody else and I said, ah, it's a little too quick.

COLARUSSO:

Ben Rosen is like Steve Jobs in 20 years...

(LAUGHTER)

.... that's where he's at, at this point.

BUTTNER:

Final topic -- the United Parcel Service plans a public offering. UPS execs stand to make millions, but will it be a good play for investors and should the competition be worried if UPS gets all this cash? Dan.

COLARUSSO:

I think UPS is great as e-commerce play, but I'm not sure whether they said they're going to use this money, $25 billion for an acquisition. I'm not sure what they're going to acquire that's going to make them that much better than FedEx or any of their competition.

CRAMER:

Don't think it will put some pressure on FedEx.

COLARUSSO:

Oh, absolutely...

CRAMER:

Ever since the announcement FedEx stock has been trading off.

COLARUSSO:

But you're going to have to pick your stocks. If not it's a business with tremendously high overhead, labor problems that UPS has had in the past. How do you manage that as a public company?

BUTTNER:

Exactly. They're going to have to start worrying about what Wall Street thinks and who knows these days.

GREENBERG:

Why do they want to put themselves through that and the real issue is if they make some lousy acquisitions because they start taking themselves too seriously, you end up having a serious issue with this company and its public stock.

CRAMER:

That said, I got to tell you, I said, a well run company -- (OFF-MIKE) didn't do it. I mean we all had interactions with UPS. So, it's been positive in my book.

COLARUSSO:

Fifty-five percent of their business comes from the Internet, from Internet related deliveries.

CRAMER:

Well, that's a good play to me...

BUTTNER:

Yes, no -- they are a great company. You have to remember that the guys who are making the decisions on this are making millions if this goes public. So there is some motivation there as well.

COLARUSSO:

Well, the old guys making big decisions make millions. That's what they get the millions for.

CRAMER:

UPS.com. -- I mean you know look, it's still working. All last week even .com was still working.

COLARUSSO:

Fabulous execution. Fabulous execution.

CRAMER:

UPS isn't even one of the most closely correlated .coms I can come up with.

BUTTNER:

OK, that's all the time we have for WORD ON THE STREET. But we're not done. Up next, no Coke, Pepsi. That was an old Saturday night live bit, but it's also a bold...

(LAUGHTER)

... prediction from one of our panelists. We will hear the details next on THESTREET.COM.

(COMMERCIAL BREAK)

BUTTNER:

Welcome back. This is the part of the show where we put our panel on the spot. It's time for predictions.

Jim, what's going to happen, and what does it mean?

CRAMER:

I will keep it simple -- sell Coca-Cola, buy Pepsi. That's what I did this week. Pepsi is much cheaper than Coke. It should have much better price performance this year.

BUTTNER:

Herb?

GREENBERG:

Starbuck's stock goes down one week when they say they're getting into the Internet, goes up when they say they're getting out of the Internet, but nothing will mask the fact that the basic business isn't doing that great.

BUTTNER:

And Dan?

COLARUSSO:

Don't get faked out by the techs if they give you a little rally. It's going to be a little more pain in that second for we become back for real.

BUTTNER:

OK, you heard it for here first. And if you're keeping score, here is a summary of the predictions. Jim says if you're in the Cola game, you want to be in Pepsi because Coke is heading south. Herb thinks that Starbuck's plan to drop its Internet strategy and focus on the core coffee business will not help the floundering stock. And Dan expects more trouble in tech.

I'm guessing you at home have some opinions on those forecasts. Well you can rate our predictions by visiting us at thestreet.com/tv. We will be keeping track of the accuracy of the predictions as well as what you thought of them.

And while you're pointing and clicking check out our website at TheStreet.com. Jim, Herb, Dan, myself and many others write every day to tell you what you need to know to make your own decisions as an investor.

And you can also chat with Jim Cramer on Yahoo. That will be happening at 2:00 p.m. on Sunday afternoon.

And that's it for this edition or "THESTREET.COM". We'll see you here next week. Until then we hope you invest wisely.

END

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