Oct. 16, 17: Guest Jeffrey Bronchick

Author:
Publish date:

Participants on Oct. 16 included host Brenda Buttner, Jim Cramer, Herb Greenberg, Dan Colarusso, Gary B. Smith, Adam Lashinsky, Alex Berenson and guest Jeffrey Bronchick. The transcript is unedited and phonetic spellings are indicated with a (ph)

.

BRENDA BUTTNER, HOST:

Hi, everyone. I'm Brenda Buttner and you are connected to "TheStreet.com."

We will be talking a lot about last week's big market selloff and, more important, what you should expect come Monday morning.

But first let's look at some stocks you might consider next week in "Stock Drill."

Our guest stock picker today is Jeff Bronchick, chief investment officer at

Reed Conner & Birdwell

.

Jeff also writes a weekly column for

TheStreet.com

Web site. His firm manages over $1 billion in assets and has positions in all of the stocks on today's drill.

They are Tricon Global Restaurants (YUM:NYSE), ServiceMaster (SVM:NYSE) and Comdisco (CDO:NYSE).

And here from

TheStreet.com

to help you decide for yourself about those stocks, Jim Cramer who also runs a hedge fund. And

TheStreet's

Senior Columnist Herb Greenberg. Herb and Jim do not own any of the stocks in this segment.

Gentlemen, welcome.

OK, first up: fast-food franchiser Tricon. Really cute stock symbol, "YUM," but it's left a bad taste in a lot of investors' mouths. It's trading at about half of its 52-week high. Why do you like it?

JEFFREY BRONCHICK, REED CONNER & BIRDWELL:

Correct. Well, we didn't buy it at the high. We started around $50 and bought it down to its current position at $38. It's not actually our largest position. Essentially it's a steady business, produces tremendous excess cash flow and management is on a very aggressive restructuring program to lower the capital that is invested in the business and raise the returns that they generate from the business through a stream of franchise revenue, as opposed to actually investing in bricks or mortar.

So, we think the combination should generate double-digit growth over the next two to three years and the stock is reasonably priced.

JIM CRAMER, THESTREET.COM:

I wrote a lot last week about how what really matters in this market are the holders, and whether they're selling or not.

Now I know you're a value manager. There's a very large holder of this stock: Julian Robertson,

Tiger

fund. A lot of rumors that his fund is not doing that well, that he will be under pressure to sell.

How do we handle a stock when we hear that there's a large possible seller in it, especially in a tough take like this?

BRONCHICK:

They're short and long run. Obviously you don't want to buy his first thousand shares, given that he owns about 7 or 8% of the company and given that the stocks went from 80 to 40, you have to wonder how much is he still there.

It is an issue, when obviously the

Fidelities

and the Tigers of the world are going to move down the tracks, you don't want to be the first guy on. You don't want to catch the knife.

HERB GREENBERG, THESTREET.COM:

You know this is all starting to make sense to me. Because you know they own

Taco Bell

, and Taco Bell just made the mistake, I thought, of getting rid of Paco the dog. And they got rid of Paco the dog, because the stock is a dog and they don't want to remind people of that.

And you've got a situation, this thing trades at less than half of

McDonald's

in a multiple range. And I'm beginning to wonder if its because there really is a reason and that reason is Taco Bell,

Pizza Hut

, and what?

KFC

-- three chains that really have never gotten their acts together.

BRONCHICK:

I would disagree on that. I think the chains are steady. You know, we ate them when we were 15. We will be -- our kids will be eating them when they're 15, and so on and so forth.

So, there is a steady business. They're not going away. Secondly, the opportunity is such that their margins are much less than McDonald's and their multiple is much less than McDonald's.

Obviously the key issue here is management execution. They need to bring different formats, continue to keep it fresh and narrow that gap.

BUTTNER:

All right. ServiceMaster. These are the guys who do what you don't want to do in your house, basically lawn care, pest control, that type of thing.

But the stock has not been well. Why do you like it?

BRONCHICK:

That's a common theme. We tend to wade in when there's a lot of doubts and questions. We're not buyers at the top. We're value players.

ServiceMaster is down from 25 to 14. Essentially they're a very steady business. They've had a terrific long-term record of growth. Management has done a great job at generating cash, delivering shareholder value, buying stock on the...

GREENBERG:

You know, Jeff, I'm not going to hold this against the company, the fact that ServiceMaster never did come to my house after the floods, disaster...

BUTTNER:

Oh, here we go.

CRAMER:

Take it personally, Herb Greenberg...

GREENBERG:

I'm going to tell you something else...

CRAMER:

What did they do, break something once in your place?

(LAUGHTER)

BRONCHICK:

I (OFF MIKE) 5,000 shares on your recommendation there.

GREENBERG:

And let me tell you something else. I've been a

ChemLawn

user for a long time -- they own ChemLawn. And I've noticed that ChemLawn has been trying to sell lately things I just don't need.

Makes me wonder what's going on here.

When you look at some of the key issues, you realize this company has weather conditions facing it, lots of competition, a labor shortage. And I have to tell you something, some accounting are concerned because they don't break out all their financial units -- they don't break out the financials.

So, what's really going on with this company?

BRONCHICK:

The only real problem that they've had over the past few years is they did a lot of services for nursing homes. Nursing-home business, a complete and utter disaster. One of the largest ones just went bankrupt.

That's been an issue. They recognize it. They took a charge in the past quarter, which was really their first, quote, unquote questionable quarter in a long time. The businesses are steady. Cross-selling is enormously popular.

CRAMER:

What turns it around? What turns it around? Steady business, charge taking? Are we...

BRONCHICK:

It's no business, X that charge. I mean they generated double-digit growth for umpteen quarters in a row. So, there's really nothing broken there. It's a steady Eddy, sells at 15 times earnings. Cheap management is aggressively buying the stock. Limited downside. Two years out, up 50%. It's not a very complicated story in our opinion.

BUTTNER:

OK. Quickly, Comdisco. They lease computers and other high tech...

BRONCHICK:

Now there's a complicated story.

(LAUGHTER)

BUTTNER:

Very cyclical business.

CRAMER:

Yeah, but they can't come to Herb's house.

(LAUGHTER)

GREENBERG:

I don't want (OFF MIKE)...

BRONCHICK:

Go red, go. Comdisco in short, everyone exactly thinks they're a leasing company. They're really a technology services company with a couple of different twists. One of their twists is they're actually one of the largest venture capital players in Silicon Valley through their leasing business. They're -- every single company that's gone out,

eToys

(ETYS:Nasdaq), everything from

Apple

(AAPL:Nasdaq) years ago,

AOL

(AOL:NYSE)...

CRAMER:

Can you spin it out? Can this be the next of son of

ICG

(ICGX:Nasdaq)? Can we safeguard...

BRONCHICK:

... they can spin it out. They are aggressively working on spinning it out. It's worth anywhere from $5 to $15 a share.

CRAMER:

It's worth the price of the stock.

BRONCHICK:

Just on that basis, we're using conservative 5 to 6 bucks. In addition, there's another IPO coming out of it called Prism (ph) which is like Net Rhythms.

CRAMER:

It's the DSL play...

BRONCHICK:

It's the DSL play. That in and of itself, if you take 75% of Net Rhythms, you come up with almost 12 or 13 bucks a share. The two of them together...

GREENBERG:

The market will recognize it. The market will recognize it.

BRONCHICK:

File the IPO and they will come.

CRAMER:

I like this.

BUTTNER:

All right, got to go. Jeff Bronchick from Reed Conner & Birdwell, thanks for being here. And we will keep your picks to see how they do.

BRONCHICK:

Thank you very much.

BUTTNER:

Jim and Herb, thank you as well, but don't go away. We will see you in bit.

Up next, did you miss out when tech took off in the Silicon Valley? Not to worry. There's another high tech revolution revving up in the Middle East. Find out from Chartman if he thinks there's money to be made in the promised land, when "TheStreet.com" continues.

BUTTNER:

Welcome back.

No question a chart can be a very useful tool. Doctors use them, salespeople. Well, they can come in very handy too for investors.

Time to check in with "TheStreet's" Chartman.

He's Gary B. Smith. Gary trades for a living from his home using the charting method. Gary joins us from Washington, D.C.

Also with us, and this week from Jerusalem, our Silicon Valley columnist Adam Lashinsky.

Neither Gary nor Adam owns any stocks that we will be talking about here.

Hey, guys.

GARY B. SMITH, CHARTMAN, THESTREET.COM:

Hey, Brenda.

ADAM LASHINSKY, THESTREET.COM:

Hey, Brenda.

BUTTNER:

Adam, what are you doing in Israel? A lot of high-powered high-tech out there?

LASHINSKY:

That's right, Brenda. Perhaps after Silicon Valley, Israel is the most important emerging high-tech area. And I'm here to write some columns for

TheStreet.com

about it.

BUTTNER:

OK, Gary, so in honor of Adam's visit, we will take a look at Israeli-based tech stocks. Software company Check Point (CHPT:Nasdaq) is on tap first, and a pretty classic chart there, huh?

SMITH:

It really is, Brenda. Here's really the real reason we're looking at Check Point. You know earlier this week Adam came to me and he said, "You know, Gar, I am tired of being a dull fundamentalist. How can I be a cool technician like you?" And I said, "Adam my son, I can help you." And what we did is we pulled up the chart of Check Point, because it's a chart that even Adam can understand.

Now there are three things he needs to remember about a chart like this. One is buy anytime Check Point is near the trend line. Two is sell or sell short if it breaks below that upward trend line. And three, if you're already long Check Point, stay long as long as is within that trend channel.

Now, Adam, pop quiz since you're right there in Jerusalem. What did Check Point do on Friday?

LASHINSKY:

Well, guess what, Gary? We actually have the Internet here in Israel and I know that Check Point was down big.

SMITH:

Now, now follow-up question. Follow-up question. What should you do now, Adam, on Check Point?

LASHINSKY:

: Nothing different than you should have done before.

SMITH:

You haven't learned a thing -- you sell short now, Adam.

(LAUGHTER)

LASHINSKY:

Now first of all, Gary, after your call on

Yahoo!

last week, I do find it a little bit amusing that you're going to lecture me...

BUTTNER:

I was wondering when that was going to come up.

(LAUGHTER)

SMITH:

Adam, bring that up. You stinker you.

LASHINSKY:

On trading calls, OK.

BUTTNER:

What do you think of Check Point?

LASHINSKY:

First point Brenda, everything we're going to talk about is tradable on Nasdaq even though these are Israeli companies.

Check Point is undoubtedly the jewel of Israel's high-tech industry. They make firewall and network security software. It's a $3 billion market-cap company.

Which means that individual investors can get in and out very easily. Met with the CEO last week. A very confident company. They company is real keeper. Perhaps the only problem with it is

Cisco

(CSCO:Nasdaq). Every now and then, Cisco, which has a competing product, flexed its muscles. The stock goes down. Things are fine. The stock goes back up again. It's a very long-term company. Nothing, Gary, to do with trading or what happened in the market last week.

(LAUGHTER)

BUTTNER:

OK, quickly, Gary,

Orckit Communications

(ORCT:Nasdaq), what does the chart say?

SMITH:

Yeah, I will tell you what the chart says. The chart says on this one, waffles taste great. I love pancakes. I love breakfast foods.

(LAUGHTER)

In this case I'm going to have to a waffle because ORCT is one tasty one. Right now do nothing. What it's done is form a perfect ascending triangle. What that means is if it breaks up above that upward resistance line, go long. If it breaks down that upward trend line, then go short. Right now, do nothing. Wait, enjoy your waffles.

BUTTNER:

Adam, it's pretty pricey isn't it?

LASHINSKY:

It is and I love it when you waffle Gary. Because what an opportunity to give some, to give some information to investors.

(LAUGHTER)

The reason we chose to talk about Orckit is that it's the prototypical Israeli high-tech company. It's management and R&D are here in Israel, but the company is technically headquartered in the United States. It makes DSL technology. That's the stuff that helps telephone lines move faster. But profits have been elusive for Orckit and that's why some of my sources are bearish on the company.

Perhaps the best bit of upside news for this company is the conventional wisdom is that it will get bought out eventually. That was maybe even more exciting last week when Intel agreed to buy Israeli chip company DSP for $1.6 billion.

BUTTNER:

OK, Gary and Adam, thanks as always. And Adam, we will be reading your reports all week from Israel from

TheStreet.com

Web site.

Stay with us. After this short break, is Lucent as good a company as it says it is, or is the stock prime for a big fall?

We will be right back.

BUTTNER:

Welcome back, You know, sometimes things aren't always what they seem on Wall Street. And if you don't figure out how to look through the smoke and mirrors, it could cost you some real money. That's why here at "TheStreet," we like to take a dose of "Truth Serum."

With us,

TheStreet.com

reporter, Alex Berenson.

Alex, let's talk earnings reports. How open are they for manipulation? Companies know that they drive stock prices.

ALEX BERENSON, THESTREET.COM:

Well, there's a lot of pressure on a company to meet the analysts' expectations. You can be short by a penny and your stock can go down 5%, 10%. So, companies will do just about anything in the book if they feel like they're under pressure to make a number.

BUTTNER:

And you know, that's always the headline, if they made the estimates or not by a penny, or not. But there's a lot more to the story, isn't there? And you're going to use an example to show us?

BERENSON:

Yeah, you really do have to drill down into the numbers sometimes. You've got to read the footnotes, and individual investors and sometimes even institutions don't have a lot of time to do that.

Lucent

(LU: NYSE), which is a huge company, owned by a lot of individuals and a lot of institutions, is a prime example. There's been questions on

TheStreet

about their earnings. And those questions are getting more -- they're getting louder as the new earnings report approaches.

BUTTNER:

And that comes out next week?

BERENSON:

That comes out -- it comes out I believe the 26th.

Now there are some big questions about the fact that they've had negative cash flow, even though they have reported record earnings this year -- $2.5 billion in earnings. But their cash on their balance sheet from operations has actually gone down by more than a $1 billion.

What that means is that they're spending money and it's not showing up as an expense.

They're building a lot of products that they haven't sold yet. They're customers are selling stuff -- or their customers haven't paid for stuff that they've bought. And you just have to wonder about that if you're an investor.

Another issue is that management says we're going to grow 20% a year. That's a huge company. That's about $6 billion a year.

BUTTNER:

Right.

BERENSON:

And there are some analysts who think that that's just impossible.

BUTTNER:

Can they keep it up. And they use something called a restructuring reserve.

What does that mean?

BERENSON:

Well, they were spun off in 1995 from

AT&T

(T:NYSE) and AT&T set up this huge reserve. And they're still using that. Now I think you say if you're an investor, why are they taking expenses and saying they're still restructuring four years later?

BUTTNER:

Right. OK, so all this number juggling, what does it mean for the stock? Are they ahead -- are rough times ahead for Lucent?

BERENSON:

Well, I think people are going to be watching this report very closely. Management said, hey we're aware of the receivable buildup. We're aware of the inventory buildup and we're going to fix it.

If they don't fix it or if they don't fix it to the the Street's expectations, this stock will likely go down even if they meet the number.

BUTTNER:

OK, thanks so much. We'll definitely be watching.

And you can read a lot more of Alex's report on Lucent on

TheStreet.com

Web site. It's part of a weeklong series called "Cracking the Books."

TheStreet's

writers take a hard look at how the companies you care most about arrive ate their bottom lines, something that could have a big impact on your bottom line.

But up next, are you looking at your funds and stocks after last week and wondering what happened? We will get "The Word on TheStreet" on what happens next, right after this.

BUTTNER:

Just an ugly week across the board for the market. That 6% drop in the Dow translated to a loss of 630 points last week.

Why? Greenspan comments, inflation worries, October jitters -- you pick.

But the real question is what happens next? Here to give us "The Word on TheStreet," Jim Cramer, Herb Greenberg and editor Dan Colarusso.

Jim, is this a buying opportunity or does the market need to shake out some more? What are you doing?

CRAMER:

Brenda, we're in a curious time here. First of all we're in a bad month. Everybody knows that. October is tough.

Every time we go up, someone from the Fed goes on and says maybe stocks are too high. Every time we go down too far, people come in and bargain-hunt. I think we're just trapped. And I know that trapped doesn't get you anywhere. It doesn't help people to say, "Look, I don't think the market is going to do anything, but it's not a great market." And we could have a trading rally next week. We're certainly due for one.

GREENBERG:

But...

CRAMER:

I'm not going to encourage. I'm not going to encourage.

DAN COLARUSSO, THESTREET.COM:

I think the Greenspan thing was ridiculous. I mean he comes out and says that people have underestimated stock risks. I mean that's day late and about $10 billion short on this one. I mean this is crazy. This is a no-brainer...

GREENBERG:

But you know the Greenspan thing shakes the market right after the concerns that

Tyco

(TYC:NYSE) might have accounting issues, shakes the market -- it shows I think there's lots -- there's very little conviction here. People are nervous on the trigger.

CRAMER:

Right, and that's why I -- there's no depth to the level of wanting to buy. When you have a stock like

Xerox

(XRX:NYSE) cut in half. And you know a stock

Raytheon

(RTN.A:NYSE), but if

Unisys

(UIS:NYSE) cut in half...

GREENBERG:

But, look at it. There was no depth to their buying...

BUTTNER:

Yeah, but they're...

GREENBERG:

There was no depth to their buying. This is my uncle Vito at home on E*Trade (EGRP:Nasdaq) pushing these stocks up for two years.

CRAMER:

It's true. There was very little worry about this market since the year began, even a little bit last year. We've had no worries. Most of the beginning of the year was kind of -- everybody was making money hand over fist. That's over.

BUTTNER:

Jim, you said a couple of weeks ago that people should hold back their 401(k) contributions and wait...

CRAMER:

Absolutely.

BUTTNER:

... until October. Should they be buying now?

CRAMER:

They have to go through this month, which we're still in October.

GREENBERG:

But are people thinking that way with their 401(k)s? Do they really -- you know, it's a routine, automatic thing. This is going to prove...

BUTTNER:

Yeah...

GREENBERG:

.... this is going to determine, you know 10 years ago we didn't have this as a cushion the way it is right now. Is it a cushion?

CRAMER:

I'm for making people money. OK, if I can tell you that I think you can make a little more money if you do it -- look if you bought the day of the crash, you could have made money...

BUTTNER:

That's market timing though.

CRAMER:

.... a year later, but that's not the point.

BUTTNER:

Of course you could, but...

GREENBERG:

You know, the market averaging down is not market timing. You know a lot of people are doing that. They're just do it routinely the same...

CRAMER:

Is it better to buy after a 500 point drop or before, I ask you.

BUTTNER:

How do you know when that 500-point drop comes, though...

CRAMER:

I keep saying there's going to be one; we're having it. It's happening.

BUTTNER:

All right.

CRAMER:

It's happening.

BUTTNER:

OK, gentlemen, time for predictions. Jim, you lead off.

CRAMER:

I think there will be a trading rally, after we get a CPI. We get a Consumer Price Index number on Tuesday. I think the number is going to be much better than people think. I've actually been buying bonds. I think you will get a nice little surge. Take it, take something off the table.

BUTTNER:

All right, Herb.

GREENBERG:

Following on Alex's comments and something I certainly wrote a long time ago, I am sure Lucent disagrees with all this. They did back when I wrote about it, but still I think those accounting issues are going to catch up with the company, and come their earnings, the stock could suffer.

BUTTNER:

Now, first of all this is all legal, right, what they're doing?

GREENBERG:

I...

BUTTNER:

As far as you know, I mean...

GREENBERG:

As far as I know, its aggressive accounting -- if it is it's aggressive accounting. Just within...

BUTTNER:

Other companies do it too.

GREENBERG:

Sure, everybody does it.

CRAMER:

OK,

TheStreet.com

is not a monolith. I personally would like to hear from Lucent.

BUTTNER:

All right.

I don't think Lucent is -- Lucent has always been an outspoken company. I would like to hear their side.

BUTTNER:

OK, Dan.

COLARUSSO:

I think we're going to see a little bit of a rally as well, coming in but for different reasons. I think there's going to be a liquidity squeeze going into Y2K worries. There is going to be a last splurge of buying before that happens.

BUTTNER:

OK. And you can chime in on those predictions by visiting us at our Web site. That's thestreet.com/tv. There's also a place there to give us your comments and questions. So, get connected and let us know what you think.

And while you're there, check out the latest from writers like Jim, Herb, Dan -- me too. It's our job to provide stories and commentary designed to help you come out on top in the stock market.

That does it for this edition of "TheStreet.com." We will see you again same time next week. Until then, we hope you invest wisely.

END

To order a tape or transcript of this "TheStreet.com" program, please call 888-44-FOXTV or use our online

order form.

Copy: Content and Programming Copyright 1999 Fox News Network, Inc. ALL RIGHTS RESERVED. Transcription Copyright 1999 Federal Document Clearing House, Inc., which takes sole responsibility for the accuracy of the transcription. ALL RIGHTS RESERVED. No license is granted to the user of this material except for the user's personal or internal use and, in such case, only one copy may be printed, nor shall user use any material for commercial purposes or in any fashion that may infringe upon Fox News Network, Inc.'s and Federal Document Clearing House, Inc.'s copyrights or other proprietary rights or interests in the material. This is not a legal transcript for purposes of litigation.