Passing on the Amex Train

Why one fund manager decided not to buy American Express.
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This column often talks to short-sellers about stocks they believe will fall and money managers and analysts about stocks they think will rise.

Now for something completely different: a money manager who tells us why he chose

not

to buy a stock. The manager is

Bob Olstein

, who runs the Olstein Financial Alert Fund. The stock:

American Express

(

AXP

:NYSE).

Olstein, whose fund has been 23% in cash for the past three years, is the ultimate numbers cruncher. His investment decisions are based exclusively on interpreting the numbers published in publicly filed documents. He doesn't call companies. He doesn't call analysts. "I don't call anybody," he says. "I'm only evaluating facts." His goal is to determine if a stock is too risky. (Don't get him started on the topic of risk. "That's the missing ingredient on Wall Street today," he says, "and not paying attention to it is what is ultimately going to be what is going to prick the so-called bubble and trip the momentum players.")

Back to our story: So, in October, when American Express briefly dipped below 70, Olstein decided to take a look at the stock as a possible buy. The company had been "tainted" along with every other major bank, and he thought it was a good, sound business with a solid brand.

But he had no idea it owned a bank, with large overseas loan exposure, until he read its third-quarter earnings report, which was released several weeks later. By this time the stock was in the high 80s. However, it wasn't until he read the 10-Q several weeks after that that he began to wonder whether there was simply too much risk -- especially at such a high price.

Unlike the earnings report, the 10-Q gave a breakdown of expenses. "I like to isolate what isn't recurring income, and what aren't nonrecurring expenses," Olstein says. "Sometimes I get good bargains that way. American Express was showing good growth in a turbulent economic environment, so I went to see how they were able to do that."

Almost immediately, he didn't like what he saw: an $80 million, or 35%, reduction in reserves against credit-card losses. Without that change, the amount of which wasn't disclosed in the company's earnings press release, the company would've missed analyst estimates. "This isn't phony accounting," he says, "but if this is the source of its growth then there is going to be a surprise, because lower reservations for charge card provisions only lasts so long."

Olstein then looked deeper in the Q for info on the bank. He found it was heavily exposed to international loans in Asia and Latin America. "The total of nonperforming loans was starting to accelerate in this bank," he says, "and in fact the reserve for losses aren't going up."

What's more, Amex, like most banks, doesn't disclose anything about the loans. "If I were an analyst and owner of American Express, I would want detailed disclosure of the type of loans they have in Central America and Asia, who they're to and why the reserve is so small relative to problems in the area," Olstein says. His conclusion: too much risk at that price, which then was in the low 90s. (It closed Friday at 100 7/16.) "If they take it down to 60," he adds, "maybe I'd be willing to buy." Meantime, he maintains no position of any kind in American Express.

An American Express spokeswoman says the company doesn't comment on the valuation of its stock, but adds that of 12 analysts who follow the company, 9 have "buys" and three are neutral.

No fan of Wall Street analysts, Olstein responds: "That means I'm right!"

Still, ya can't help but wonder whether Olstein regrets missing such a big rise. Doesn't he wish he hadn't paid so much attention to risk? Doesn't it hurt to realize he missed making such a fast profit? Doesn't he believe he's letting his investors down with a fund that so far this year has returned a meager 11%?

Nah. "People will penalize me for the fact I worry about risk," he says. "We'll see five years down the road who was right." He says he'd rather miss a stock that rises than get caught owning one that takes an unexpected hit. "When something happens and they can't get out, what's it worth not to be there?

"The bull market has dulled everybody's senses."

To put it mildly.

Attention money mangers and analysts: Ever come across stocks you have decided

not

to buy? Wanna share your reasons

on

the record? You know where to find me.

Herb Greenberg writes daily for TheStreet.com

. In keeping with the editorial policy of

TSC

, he does not own or short individual stocks. He also does not invest in hedge funds or any other private investment partnerships. He welcomes your feedback at

herb@thestreet.com

. Greenberg writes a monthly column for

Fortune

and provides daily commentary for

CNBC

.