July 31, Aug. 1: Guest Henry Blodget

The analyst appears on "TheStreet.com" on Fox News Channel.
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Participants included host Brenda Buttner, Jim Cramer, Jeff Berkowitz, Herb Greenberg, Dan Colarusso, Joe Bousquin and guest Henry Blodget. The transcript is unedited and phonetic spellings are indicated with a (ph).

BUTTNER:

Hi, everyone. I am Brenda Buttner and you are connected to TheStreet.com. We're here to help you make your own investing decisions.

It's time now for Stock Drill. Our guest stock picker today is Henry Blodget. He is a senior analyst for Merrill Lynch and widely recognized as one of the top people in his field when it comes to Internet stocks.

Amazon.com, AOL, and Yahoo! are the stocks he will be talking about today. Blodget recommends all three of these as long term buys.

Also with us from TheStreet.com, Herb Greenberg, and Dan Colarusso. Neither has positions in any of the stocks.

Gentlemen, thanks so much for joining us.

UNKNOWN: Thanks for having us.

BUTTNER:

Internet retailer -- Amazon.com. Why do you like it?

BLODGET:

We think it's one of the best management teams in the industry. They have an enormous opportunity. They're investing for the future. They're growing at an incredibly rapid rate, one of the fastest growing companies in history, and we think long term. They will be profitable and they will generate a good return for shareholders.

GREENBERG:

You know Henry, I have to tell you something. I have been critical of this company in the past in my column. But I am conflicted because I love shopping there.

However, take a look at some of the numbers. You see the cost of acquisition, acquiring new customers, is going up.

The revenues per customer is going down. Their losses are getting wider. We're not talking about a start-up here Henry. We're talking about a company. People want to start seeing some performance here.

BLODGET:

We're talking about a company that is acting like a start-up in terms of its investing for the future. Venture capitalists have long understood that if you invest a lot now you will reap much greater rewards later. And Amazon is doing that.

COLARUSSO:

How much? I mean much and when? When can we starting looking at this as a retailer and pop that net bubble and anything else that's pushed this thing up. I mean when we can we say, OK, the bricks and mortar are there? The technology is there. Let's start treating it as a real company.

BLODGET:

Amazon is investing for probably a $5 to $10 billion revenue run. They're at $1 billion right now. They've not built that capacity to handle $5 billion. So, over the next year or two you should start to see leverage in the model.

BUTTNER:

Henry, Jim is not here -- Jim Cramer -- is not here in the studio but not surprisingly, he has strong opinions about Amazon.com and we wanted to get your response to those.

BLODGET:

I imagine so.

CRAMER:

Amazon's strategy is not caring about profits, and just taking market share will make life miserable for everybody in the e- commerce segment that competes with them. I say take a break and don't buy these stocks until December.

BLODGET:

They're making life miserable for everybody else, it's probably a good thing to have.

So, if you're own one, own this one.

BUTTNER:

Well, Henry I thought that the advantage -- a chief advantage of an e-tailer over a retailer is that they don't have to deal with inventory costs. So what does Amazon do? It's says lets spend $300 million on building warehouses for inventory.

BLODGET:

That's still a lot less inventory than a typical retailer will have to deal with. So, if you're looking at returns of capital they should have much higher returns on capital than Barnes and Noble, WalMart - - everybody else.

BUTTNER:

OK, the world's largest Internet service AOL -- what do you think?

BLODGET:

Still the top brand in the industry. They have a great management team. They're well loaded up for international growth which is where we think a lot of the growth is long term. We think the brand will win. They obviously face challenges as they always do, but they've come through them before with flying colors.

COLARUSSO:

Henry I spoke two hedge fund managers this week, very different opinions. One said this is a wasting asset, the technology, AOL's technology always a problem, not quite where it should be. Some problems in Europe.

Another one says in the '90s, this thing is a bargain. Where do we see this coming out?

I mean -- AOL -- what's our window on that?

BLODGET:

People have always trashed AOL for its technology, for its service. It has some of the best service in the industry and some of the best technology in the industry. If you look at other ISPs they tend to crash when they got to a million, two million subscribers. AOL has 17 million that they're supporting. They have more viewership than a lot of cable channels. It's a tremendously powerful company.

GREENBERG:

You mentioned cable channels. And you have this issue that's becoming a big issue, especially in San Francisco recently where they approved, or they actually -- put down what they call open access. What about this so-called open access issue where you have -- AOL would have to pay to go over cable?

BLODGET:

What we believe is a broad band, along with telecom, will not be dominated by the pipe owners. So that broad band will be a multi- technology solution. You will have cable, DSL, wireless, satellite and telecom. In that environment the content provider should cross all of those. And that's what AOL has done on telecom. We think they will do the same thing ultimately on cable.

BUTTNER:

It's a very selective campaign by the way for open access when AT&T wants to block AOL that's really bad, but when Microsoft wants to get in with some instant messaging, OK.

BLODGET:

That's true.

(LAUGHTER)

BUTTNER:

What about going up against Bill Gates?

BLODGET:

I think Microsoft is fine. Obviously, Microsoft wants to crack into the instant messaging monopoly that AOL has and that makes sense. We can understand that. I think AOL is in that strong position as well. I mean, there's no reason that they should be forced to open that.

BUTTNER:

OK, search engine -- actually it's a lot more -- Yahoo!, very quickly.

BLODGET:

It's a lot more. Again they have one of the strongest management teams, one of the strongest brands and a strong international strategy. Those are all very important. They're the dominant brand in what they do. They've become much more than a search engine and we think long term, they're in a great position to really compete with AOL for their content.

GREENBERG:

You know, I have to tell you something. I've done a lot of work trying to find some really serious issues about Yahoo! and I'm having trouble. You know, it's a great service, but when you still come down to valuation, Henry, how can you talk about a stock at this level at this price and say you can feel comfortable here and that it's going to go higher?

BLODGET:

I don't think you can feel comfortable with any of these stocks. . . . you have to have . . .

COLARUSSO:

Wait a second. Brenda (ph), did I just hear you say can't feel comfortable with anything.

BUTTNER:

He's saying that.

BLODGET:

Only put a small percentage of your portfolio in direct Internet investments. Volatility is not for everybody. Yahoo! is one of the leaders. We think the market opportunity can support a much larger market cap than they have. It may take several years to get there, but when do you buy it? Do you wait for it to go down and miss it? That's a risk too. So, it's a (OFF-MIKE)

COLARUSSO:

What about the traffic slow down? I mean, traffic growth last quarter was only 15 percent, down from like 40 the quarter before. I mean, is this something endemic to Yahoo! right now, what's going to happen?

BLODGET:

This is a -- June is a very sequentially weak month. A lot of people are going on vacation (OFF-MIKE) on traffic. Last year they only had 21 percent growth in this quarter. So, really it isn't bad. We think it's mainly seasonal.

And Yahoo!, the international position is very strong. The company's there (OFF-MIKE) limited to the United States we think will have problems. But Yahoo! has a big international audience. International is growing much more quickly, so we think they're fine there.

BUTTNER:

Sorry, guys, time's up for Stock Drill. Henry Blodget, senior analyst for Merrill Lynch, thanks for doing the Drill.

BLODGET:

Thanks for having me.

BUTTNER:

And thanks as always, Herb and Dan.

Up next, when a fundamentalist and a chartist agree on a stock you better listen up. We'll fill you in on all the details.

And later, (OFF-MIKE) didn't get enough of Cramer? The trader invited our cameras into his office while the market was open. You'll feel the pressure he feels every day and get a trading tip you'll be able to use for your own investing. Stay with us.

BUTTNER:

Welcome back. And so, how do you know when to buy or sell a stock? For some investors, the chart tells all. Well, meet TheStreet's chart man. He is also known as Gary B. Smith. He trades for a living from his home using the charting method. 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 much more fundamental level. Neither Gary nor Adam owns any of the stocks we'll be talking about here.

Well, first up, Gary, the chip maker for communications devices, Boadcom. What do your charts say.

SMITH:

Brenda, if you looked at a chart like Broadcom -- let's just say you own Broadcom and you saw it drop 40 points, what would you do? You'd go Arghhh! You'd be scared out of your mind. It'd be like your own little Blair Witch Project this stock.

(LAUGHTER)

But I tell you what, you rarely have an opportunity to get into these high flyers. All Broadcom has done is pull back to the bottom of its upward trend channel. I think right now is a perfect low risk time to get on to this rocket ship. And I would be seriously looking to buy right now.

BUTTNER:

Adam?

LASHINSKY:

Actually, Brenda, what's scary about Broadcom is how well it's done. It's a terrific company. It's supplying semiconductors to set- top devices like cable modems and the like.

The problem is it's already doubled this year -- terrific company. It's also -- it owns its market. But companies like Texas Instruments and Intel are coming after Broadcom. That's something that the chart won't tell you. It trades for a very high multiple compared to Intel. And so you probably want to wait for an opportunity.

One of my favorite bullish analysts on Broadcom said to me today, it's not like this stock hasn't been discovered. He's not so bullish lately.

SMITH:

Well, Adam, look, I agree with that. But if we use that argument, no one would ever be buying Amazon or eBay or any of those. People have discovered it, but it's been brought down. That's why I was saying now is maybe one of your only opportunities to get in on this stock.

LASHINSKY:

This is true and that is a risk, Gary. But probably not the only opportunity.

BUTTNER:

OK, guys. From the high-flying Internet down to nuts and bolts quite literally, Illinois Toolworks. Not quite as boring as it seems, is it, Gary?

SMITH:

No, I'll tell you what, I love this chart. Here's a chart if you looked at you go, boy, is that messy. You got lines all over the place. And then with the power, the hocus pocus of technical analysis, you draw a few lines on -- all of a sudden it doesn't look so messy. What it's really done is it's shot up in April and now it's just moving sideways, consolidating those great gains it has on declining volume which is what we want. I think the next thing this thing is going to do is go up to 80 and when it reaches that it's going to burst through and go to 100. I really like ITW.

BUTTNER:

Do you like it, Adam?

LASHINSKY:

Yeah, actually Brenda, here's the one that we do agree on. I like it because it is boring. This is the kind of stock that investors love to just buy, throw in their portfolio, and forget about. It's the supplier to the industrial economy. It literally makes nuts and bolts. It's got 20 percent plus annual earnings growth over the past five years. That's terrific for a widget company. And it's management doesn't get itself in the news all the time, and do a lot of hype. It just makes money for its investors.

BUTTNER:

But you know you guys talked about discovering Broadcom. Are investors going to discover this one? I mean this is the age of the Internet sexy Internet stock.

SMITH:

Well, let me jump in on that one Brenda. I tell you what, this is very similar to Broadcom actually. It's pulled way back from its all time high, at least the highs this year. So, I think a lot of people have discovered it, got disgusted, thought it just wasn't going to go straight to the moon. It's pulled back now like Broadcom -- I think it's the time to jump in.

I'm fully without -- in fact I'm writing this down that Adam and I have finally agreed on a stock.

BUTTNER:

Makes me nervous.

(LAUGHTER)

LASHINSKY:

Brenda, it couldn't be less like Broadcom and that's why it's probably a good thing for certain investors.

(LAUGHTER)

BUTTNER:

All right guys, thanks so much for joining us.

SMITH:

Thank you.

LASHINSKY:

Thank you Brenda.

BUTTNER:

And up next, Cramer -- we go into the foxhole with the trader who buys and sells thousands of shares every day. You will see some things that could help you. That's next when TheStreet.com returns.

BUTTNER:

Welcome back.

So hot enough out there? It has been a summer of record temperatures in much of the country -- don't worry I'm not going to do a weather report OK. But our Jim Cramer has been feeling the heat also and he thought the climbing thermometer could make for a good investment.

You see when he isn't here on this show, or writing for TheStreet.com website, you can usually find him on Wall Street at Cramer-Berkowitz. He and his partner Jeff Berkowitz manage a multi-million dollar hedge fund. The fund usually does very well, but not every trade works out the way that Jim planned.

Take York International. That's a company that makes air conditioners. With this hot summer Jim thought it was a good buy. But even a pro can learn a new lesson. And maybe you can too.

Take a look.

(BEGIN VIDEO CLIP)

CRAMER:

The game is a little harder than it seems to be. In other words, it's hot, let's go buy air conditioners. That's a quaint idea. You have at first. You can't just have it and expect to make money. We had no edge here. This was a mistake in trade. It was done because I tried to capitalize on something that had already been capitalized.

BERKOWITZ:

To get behind the original genocide in the trade we actually looked -- we bought in June and now is the time to make the best - - that was the start of the season when everything really took off, when the thermostat took off. So, when you look at it in hindsight, you say well what was my edge. You want to have some sort of advantage, some better insight than conventional wisdom.

CRAMER:

We're hearing now that the tone (ph) of business remains very strong. They had very heavy inventories. They would have had a bad quarter if it hadn't gotten hot.

Need to see it get hotter. This guy needs it to be 100 degrees out to make any money. We...

(LAUGHTER)

I would argue that we should never have done the trade because we knew it was hot in June. It's been consistently hot. Everyone knew what we knew. We had no edge.

Take or losses, or try to break even, move on. No big deal.

BERKOWITZ:

I agree, it's time to go. Sell the order (ph). Let's just get a sense Mark. I would like to be able to lose it all if I can.

I don't want to hurt the stock because I know that there are a lot of people -- you know, it was an OK quarter. There is nothing bad here. There is just nothing so exciting as to make it so we can make any money with this trade. I just want to move on. Let's go on to something else.

CRAMER:

The biggest mistake people make in investing is to be able to say hey, OK, look that idea that it was hot, that didn't work. But you know something I got a new reason why I'm in it. You have global warming. Al Gore running for president. No, you can't foment new reasons. You just ...

BERKOWITZ:

Al Gore is pro-air conditioning.

CRAMER:

He's pro-air conditioning.

(LAUGHTER)

But you've got to go and you've got to say, listen, that one didn't work. Find me something better. And it's on to the next one.

(END VIDEO CLIP)

BUTTNER:

By the way, York closed this week at 44 11/16, that's down 1 1/16 for the week. And Jim Cramer will be back here in the studio for next week's show.

But up next, day trading under scrutiny after a murderous rampage in Atlanta by an investor upset about stock market losses. We'll get the word on the street right after this.

BUTTNER:

Welcome back. Joining us for this week's Word on The Street segment, from TheStreet.com, Herb Greenberg and reporter Joe Bousquin. And in Washington, Gary B. Smith.

Gentlemen, it was a sobering day Thursday when a man in Atlanta shot and killed numerous people. It's been reported that he was upset about losses in the stock market that he suffered as a day trader.

Now, obviously, there was something wrong with this person beyond some bad trades. But the tragedy has brought enormous attention to day trading. Herb, who are the type of people who are taking this up.

GREENBERG:

Unfortunately, too many of the -- almost everybody. You've got them from all walks of life who think that they can make a quick buck, Brenda, and that's what concerns me, especially when I hear people who are like attorneys who suddenly make one or two good trades and say, hey, this is great and they start doing it and they get this false sense of complacency.

BUTTNER:

Gary, you have actually done this. You day traded for quite a while and, in fact, you still trade for yourself in your home. How easy is it?

SMITH:

It -- I'll tell you what, Brenda, day trading is -- it's brutal. You are under constant pressure for the whole time the market's open, before the market's open thinking about your trades, after the market. The stress is enormous. For the time I did it, I really could not handle it. It was just too stressful for me.

BUTTNER:

And Gary, the difference between what you do now and what you did as a day trader is basically you're time horizon. As a day trader you would get in and out of stocks within minutes and now you hold positions?

SMITH:

Yes, exactly. I mean, that's the normal definition of day trading that a person might get in there and they might make 20, 30, 400 trades in a single day, but rarely holding a position overnight.

BOUSQUIN:

OK, now come on. Day trading, clearly, is not for everybody, but we can't let and instance like this vilify it for everyone.

Now, what Gary's saying is very true. I was at a party here in Manhattan a few weeks back -- the market was -- it was going up and down, a little bit choppy -- a bunch of day traders there. And they're sitting there walking around in circles. They can't stop thinking about the market. That said, I do know people that made money in this strategy. I know some young people that have come out of college, have made some good money and are using it as a jumping off point for their careers.

GREENBERG:

Joey, I've got to say one thing though. In the end day trading is gambling. And I've talked to people who are talking about day trading. And they're good -- the really good ones, they're gamblers, they play good bridge. They know how to take a certain risk. It is not for everyone.

SMITH:

Herb, I disagree with that.

GREENBERG:

What is it, Gary? (OFF-MIKE) Come on, Gary.

SMITH:

I'll tell you why I disagree with that. You made a good analogy in that it's like a good bridge player. A good bridge player has a strategy. And if you're a day trader -- look, I agree it's very, very difficult. But one of the problems...

BUTTNER:

But, you know what I don't get about it, Gary, is there's no attention at all on the fundamentals. Just like I don't understand chartists, exactly, either.

SMITH:

Exactly, but it really doesn't matter as long as they have some sort of strategy. That's where the stress comes in. If you go into day trading and you don't have any other strategy other than thinking, I'll just buy low, sell high 500 times a day, then you start blaming yourself for your losses instead of your strategy.

BUTTNER:

OK, that's all the time we have for Word on the Street this week. But, we're not done, just yet. Time now to put our panel on the spot and get predictions for what might be ahead in the world of investing. Herb?

GREENBERG:

My sources say that Just For Feet, even at its lowly price of about three and a half dollars per share, is still going to get trampled.

BUTTNER:

Joe?

BOUSQUIN:

The market's going to keep going down next week and mutual fund investors are going to start selling out. But, the smart money says, don't do it because we're going to see a rebound in the fourth quarter.

BUTTNER:

The long term investor. OK, Gary.

SMITH:

I agree with Joe. I think the market is in terrible shape except for one great sector right now and that's energy and energy services. Two that I like are Apache and Barrett Resources.

BUTTNER:

Apache was up about 5 percent on Friday.

SMITH:

Moving up.

BUTTNER:

Well, do you have some opinions on our forecast? Let us know. You can rate our predictions by visiting us at thestreet.com/tv. We'll be keeping track of their accuracy as well as what you thought of them.

And while your there, check out our web site at thesteet.com. Herb, Joe, Gary, Cramer, myself, and many others write every day to tell you what you need to know to make your own decisions as an investor.

And that's it for this edition of TheStreet.com. We'll see you here next week. Until then, we hope you invest wisely.

END

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