Sept. 18, 19: Guest Michael Kagan

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Participants on Sept. 18 included host Brenda Buttner,Michael Kagan, Jim Cramer; Herb Greenberg Adam Lashinsky Gary B. SmithDave Kansas and guest Michael Kagan.BRENDA BUTTNER, HOST, TheStreet.com:

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

TheStreet.com.

We're here to help you make your own investment decisions. Let's get right to it with this week's Stock Drill.

Our guest stock picker today is Michael Kagan. His Salomon Brothers fund has returned about 13 percent so far this year. The stocks Michael thinks you consider are three that are in his fund -- American Home Products (AHP), Bell Atlantic (BEL) and Compuware (CPWR).

And with us from

TheStreet.com

to help you decide if these stocks are really for you, Jim Cramer who also runs a hedge fund and

TheStreet.com's

senior columnist, Herb Greenberg.

Herb does not own any of the stocks in this segment and Jim are you long any?

JIM CRAMER, THESTREET.COM:

No.

BUTTNER:

OK. All right, we're all set gentlemen.

First stock, American Home Products, drug maker and global health care company. Why do you like it?

MICHAEL KAGAN, DIRECTOR, SALOMON BROTHERS ASSET MANAGEMENT:

I like it because the stock has gotten demolished. It's down from 70 to 46 as of today. That's down $33 billion in market cap. And it's down partly because the group is down, but most of all because of this big fen-phen lawsuit. That's the diet drugs.

I think it's way over done. I started as a building analyst. I saw asbestos. This is no asbestos. The $10 billion estimates on the street for this liability are way too high.

CRAMER:

Hold it Michael, just a second.

I understand. I heard everything when the lawyers get involved, every analyst always me the same thing -- not to worry. It's not asbestos. But I have seen Philip Morris (MO) lose half its value.

I remember another company A.H. Robbins (ph) put out of business by class-action wars.

How do we know if the FBI doesn't get involved, if the lawyers continue to fight...

KAGAN:

OK...

CRAMER:

... how do we know that this is over?

KAGAN:

... OK, here's the difference. The difference is that it's not an exploding liability. Asbestos is an exploding liability which is you don't know how big it is. Every year it gets worse because one year you get a mammogram, or rather -- you get an x-ray and you don't have asbestos. Asbestos -- and the next year you do.

With his problem, with the heart murmur, if you don't have it now, you're never going to have it.

CRAMER:

Aren't they totally distracted by this litigation? Does this management know what it's doing in the face of this class action bar?

KAGAN:

They are doing everything they can to get this litigation done as fast as possible. And that's why I like it so much right now. That's why I'm presenting it here because you're going to see this thing delimited fast, maybe in the next couple of weeks.

GREENBERG:

This company admits it has errors in judgment and may have made errors in judgment. And again, that falls right off of what Jim is saying. It's a management issue. You know this is a big problem, these guys have. You have clouds hanging over this company forever.

KAGAN:

Absolutely. On the other hand you've had a $33 billion haircut to the valuation of this company, and I think worse case this thing is going to be in the high single digits billions.

GREENBERG:

Yes, but for how...

BUTTNER:

But why even bother though? Why not go with Eli Lilly (LLY) or Merck (MRK)?

KAGAN:

Because -- because one of the best ways to make money in the market is to find things which the market misunderstands. And I think that the market clearly misunderstands this. This stock is really cheap. It's got a great drug pipeline. It has seven drugs that are coming out in '99 and 2000, they're going to power a terrific earnings growth over the next couple of years. It has no patent expirations. And so as soon as you get this diet drug stuff out of the way, it should be clear sailing on the stock.

BUTTNER:

OK, Bell Atlantic.

KAGAN:

OK, Bell Atlantic is the biggest position in my fund. The reason I like it is because it is the best play on convergence. It's a play on the Internet. And when you're a telephone company the biggest mistake that you can make...

GREENBERG:

Michael, I got to tell you something. I don't want to hear Bell Atlantic. Now we're not even going to talk about it now...

(LAUGHTER)

... we're not going to talk about a natural disaster that caused me to lose my phone service. We're not going to talk about -- we're not going to talk about...

CRAMER:

Taking it personally with Herb Greenberg...

BUTTNER:

Yes, very personally...

GREENBERG:

We're not going to talk about a natural disaster -- no cellular service from Bell Atlantic. But when you talk about this being convergence and Internet service here, fast Internet service. They call it DSL -- I live two miles away from one of their central switching stations and they can't get me the service that they promised and they say it's available.

Why should I trust these guys? And why should I think they're any better than any other bell in making this possible?

KAGAN:

Hey, do you know what, when Microsoft (MSFT) has come out with a new product, has it ever been good the first time around?

DSL is a brand new product. They're just putting the thing on the market. It's going to take some bumps and bruises before they get the thing going OK.

That's not what's important here...

GREENBERG:

But I don't take the fact that they advertised this thing in a big splashing ad in

The Wall Street Journal

or the

New York Times

, and they still can't get this...

CRAMER:

Maybe there's some value here. I mean away from this DSL thing that you couldn't get.

GREENBERG:

What value? Why...

(LAUGHTER)

KAGAN:

The key is that they are -- have got the best foot print as an RBOC (ph). OK, they've got New York which is wonderful. They are going to be the first of the RBOC (PH) into long distance, which is where it's at.

What you want to do is you want to go and originate a call. You want to go and carry it over your lines and you want to end the call. That's how you're going to have your best cost position.

This Vodafone (VOD) thing that they're doing is absolutely terrific. They could have overpaid and competed with Vodafone earlier this year for AirTouch. And you know that's the wireless. Instead, they walked away from it...

BUTTNER:

All right. Sorry, moving on to software company Compuware.

KAGAN:

Yes.

BUTTNER:

What's the deal there?

KAGAN:

The deal there is you've got a terrifically fast growing company. Revenues this quarter could be up as much as 50 percent over the last several years. In line with that, the stock was trading 20 times...

CRAMER:

Whoa, let me tell you why I think it's traded 20 times -- here's a...

(LAUGHTER)

... here's a super-dupity, long screaming buy report from house banker Robbie Stevens (ph) telling me -- look, there's one risk here. Investment risk -- slowing mainframe market. Didn't we learn from IBM (IBM) just last week that the mainframe market is slowing. Wasn't that why IBM was down? How can I own this stock is mainframes are slowing?

KAGAN:

Mainframes are a part of it, but they -- but just because mainframes are slowing, doesn't mean mainframe software is slowing. Mainframes are the key to the Internet. They're the core. They're fast. And remember that they constrain you're -- the speed of your transmission.

GREENBERG:

Michael, insiders have been bailing out of this stock left and right. The stock has been falling. They've been selling on the stock fall, and why that shouldn't give anyone confidence, or should it?

KAGAN:

I don't think that this is unusual. I think if you look in most tech companies, you will see that there'D significant selling...

GREENBERG:

Not usually when they're selling when they're falling. They're selling when it's going higher.

KAGAN:

You know, look, the stock got clobbered after the announced the earnings because the revenues came in lighter. I think that they definitely screwed up their guidance to the street. They definitely didn't, you know, did not tell people where the revenues were going to be.

On the other hand, when you look at the quality of the earnings, the balance sheet looked fine, and they actually beat the number and they beat the number on better operating margins.

All right, when a tech company growing that fast...

BUTTNER:

Right.

KAGAN:

... misses, they miss because they didn't -- they misplanned. These guys didn't misplan. They miscommunicated.

I think it's fine.

Gentlemen, we have to take a short break. Michael Kagan from Salomon Brothers Fund, thanks for doing the Drill today.

We will be tracking American Home Products, Bell Atlantic and Compuware to see how they're doing when you come back on the show.

Jim and Herb, we will see you in a few minutes.

But up next, you just heard about Bell Atlantic. Well, what about the company that invented the telephone? We will see what the chart and the Chartman say when "TheStreet.com" returns.

You don't need to know the bottom line or the earnings report. Not if you know how to read the charts. As least, so says Chartman.

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

With us as well in San Francisco, our Silicon Valley columnist Adam Lashinsky who reports on companies on a more fundamental level.

Hey guys.

ADAM LASHINSKY,THESTREET.COM:

Hello Brenda.

GARY B. SMITH, CHARTMAN, THESTREET.COM:

Hi, Brenda.

BUTTNER:

Gary, let's start with telecom company Lucent (LU). What do you see in the chart?

SMITH:

Well, I'll tell you Brenda, Lucent is like -- remember that toy that kids used to play with years ago. Maybe back in my time -- the Weebles.

BUTTNER:

Oh, yes Weebles wobble.

SMITH:

Exactly.

Well, Lucent wobbles, but it won't fall down. That's the beauty of this stock.

You know I looked at a weekly chart of this thing. And it's been up; it's been down. But the trend line since the beginning of this year if just nicely up. It's rising great. It's sticking on that trend line. I say do not sweat Lucent. Hold on. It's a beautiful performing stock.

The only reason I would get nervous if it fell below $60 and then I would boot it, but I love Lucent otherwise.

BUTTNER:

Adam, Gary isn't sweating. What about you?

LASHINSKY:

Not sweating either. You've really got to love Lucent Brenda. This is the company that of course the old equipment arm of AT&T (T). It's the supplier to the phone companies and that's even better than Cisco's (CSCO) position.

The phone companies trust Lucent. They trust them to supply them with products that will last years, not months. That's phone time, not Internet time and that's good.

It's a little bit cheaper than Cisco. It's worth about $214 billion versus $237 billion for Cisco. It's also cheaper on a multiple basis. Sixty times this year's earnings versus 75 times this year's earnings for Cisco. That's not cheap however. That's a real nosebleed valuation.

If the market comes down, if tech stocks come down, Lucent goes down.

SMITH:

Adam, I will say this one caveat though. If you're not sweating, then I start to sweat.

(LAUGHTER)

BUTTNER:

OK, 3M (MMM) -- perhaps best known for its post-it notes. Gary, you've got post-it notes all over this chart. It's pretty messy isn't it?

SMITH:

Yes, it is a messy chart. I will tell you what this is like. This is like Brenda, one of those great old fashioned Schwarzenegger movies and it would have the title something like "This Dog Can Hunt." You know the plot of those movies. At the beginning of the movie all Schwarzenegger's pals get bumped off and then he spends the rest of the movies avenging their loss by getting the bad guys.

Well, in this case, 3M is Schwarzenegger. And what it's been doing since about late '98 or so, is picking off all those evil congestion areas as it climbs its way back to the top, its rightful place. Right now 3M is right below 100. And I will tell you, here's what's going to happen.

It's going to burst through 100 and then it's really going to fly. Just like Schwarzenegger, justice will prevail -- 3M is a buy anywhere above $100.

BUTTNER:

Adam, what kind of plot do you see for this bad movie?

LASHINSKY:

Actually, Gary I'm going to use the products to show you whatt I see here, OK. (Holds up Post-it note with "The Chart Lies" written on it.)

(LAUGHTER)

Can you read that Gary?

The chart lies, OK. The stock is up because 3M has big exposure to Asia. Asia is doing a little bit better. So, the stock is going better. It cut 5,000 jobs. That's good for cost cutting. But it's an industrial company priced like a tech stock, at 24 times earnings. It's twice its growth rate. The company lacks focus. They make all sorts of things -- in health care, to films, to post-its. They even make network interface cards. That's not a good business for the market leader, 3Com (COMS) in Silicon Valley. That's 3M Gary.

SMITH:

Well, I'll tell you, Adam, I think 3M is going to go to the top and you are going to be sorry when 3M is sitting at $150.

LASHINSKY:

I'll save my prop as a relic.

(LAUGHTER)

BUTTNER:

OK. Gentlemen, thank you both. We will see you again next week.

LASHINSKY: Thanks, Brenda.

BUTTNER:

But after this, why is the government looking into how much money mutual fund companies charge you?

Plus, when a bad earnings report is an opportunity for you to buy.

We will get the word on the street when "TheStreet.com" returns.

BUTTNER:

Seventy-seven million of us own at least one mutual fund. That's almost one out of every three people. But that doesn't mean all is well in the fund world.

The government is now investigating why funds are still charging so much in commissions, when trading stocks is cheaper than ever and there's also more of a push for investors to buy class B shares which generally have more hidden costs than class A shares.

So, why not just buy individual stocks?

Here to give us the word on the street about that and more, from "TheStreet.com" Jim Cramer and Herb Greenberg. And also joining us

TheStreet.com's

's editor and chief, Dave Kansas.

Dave, are mutual funds ripping off the average consumer?

DAVE KANSAS, THESTREET.COM:

I think that's a little strong to say ripping off. But certainly one would think the cost structure would change with trading costs coming down as fast as they are.

BUTTNER:

With assets growing.

KANSAS:

With assets growing -- but cost structure stays the same and I think -- I think the fund industry has gotten away with a pretty soft operating environment for a long time. That's starting to change I think.

CRAMER:

Do you think they get away with it because of they are the largest advertiser of almost every major newspaper and no newspaper will take them on?

KANSAS:

I'm not sure if that's everything to it, Jim. I think if financial sections -- they're the largest provider...

BUTTNER:

Some of them -- it's not...

GREENBERG:

No, no, no, no, no, no -- newspapers take them on.

KANSAS:

It's not just the newspapers.

BUTTNER:

Now let me ask you. People are switching to stocks. Stocks are sexier. I think this a fake fight though. I mean, you should just stick to De La Hoya and Trinidad truly...

(LAUGHTER)

... because the truth is, you can own both stocks and mutual funds. You do, right, Jim?

CRAMER:

I think that's right, but I don't like the compensation system. Look, I'm a hedge fund manager. I'm paid for -- get a percentage of the profits...

BUTTNER:

Right.

CRAMER:

... and a small percent of the revenues that I manage. Why, why, why don't these fees come down for both S&P funds and for big mutual funds? When you run $30 billion, $40 billion they should be -- they're taking a huge cut. And they're not aligned with your interest. They're in there and they're not aligned with your interests.

GREENBERG:

Of course, I still wonder -- you know, I'm surprised we're even saying are they charging -- are their commissions -- you know this commissions taking advantage of us? I'm surprised the commissions exist any more in any event that...

BUTTNER:

Well, they have not come down. It's -- they have definitely not come down.

KANSAS

I'm just surprised it's not just no load all the way. Because, you know if people are getting used to basically...

BUTTNER:

But it's not just no load. I think that's a specious debate...

KANSAS:

You're not the talking about the fees inside the...

BUTTNER:

... it's not low versus no low. It's high fee versus load...

CRAMER:

But it's good to have a mix. I like to have a mix. What I don't understand -- some one tell me, S&P funds. No thinking whatsoever. Why are they charging anything at all? Don't they just type it is...

BUTTNER:

No, no, there is some...

GREENBERG:

No, there's involvement there. Come on Jim, you know that.

BUTTNER:

... trading involved and it's very cheap. It's cheap...

KANSAS:

You've got to make some money. They just got to make some money.

BUTTNER:

What is it on Vanguard, .19 percent? That's nothing compared to...

CRAMER:

But when you're running $400 billion, I mean you know -- honestly, I'm not saying that you can go to the Philadelphia Zoo and get that world of monkeys and they can put a bid for Vanguard because I know they're in Philadelphia. But I know that there's a little more to it than that. But, in terms of...

BUTTNER:

Yes. All right, next topic -- earnings. Stocks tend to move north on a good report, and they move south on a bad one. Thursday, three big companies -- Raytheon (RTN) Federal Express's parent, FDX (FDX) and Xerox (XRX) got bad news on the earnings front and were hit hard.

Jim, when if ever, are one day drops like that a chance for an average investor to get in?

CRAMER:

OK, longer term investor, here's what I like to do when you have what I call an earnings blow up like that...

BUTTNER:

Right, right.

CRAMER:

Wait until they report the actual quarter. Remember these are pre-announcements. Wait until they report the actual quarter and then see whether they've gotten any more positive guidance since they made that pre-announcement. If they have, if Xerox comes out one month later in a report position, we cleared a lot of those problems -- that's when you move. Not now because we don't know what the tenor of business is -- it's bad.

GREENBERG:

Jim, I have to tell you something. The concern I have in your discussion is that in the end every investor really ought to be talking about the old long term. If you really believe this thing, any blip in earnings in any quarter is insignificant. You know that.

And you're a trader and you look at it like a trader and an investor looks at it differently.

KANSAS:

But I think the danger here really is that when these dips occur, people say good chance to buy because the market has always gone up. But the fact of the matter, sometimes these big blow ups are because there are big problems...

GREENBERG:

Oh, yeah there have been a lot of blow ups lately.

KANSAS:

Look, at Cendant or a company like that that says, hey we've got big problems, and they've got big, big problems. And people jump...

CRAMER

: But Gary Smith, remember he showed you that chart for BankOne (ONE)...

BUTTNER:

Right.

CRAMER:

Ann he said do you think it's a buying opportunity? I'm telling you the stocks are going to go lower. He was dead right. It went lower. This is the first dip is not the last dip.

BUTTNER:

But the companies just manage these expectations. I mean how real, how real are the earnings?

GREENBERG:

Not doing a job managing them either...

KANSAS:

Well, if they manage them really well, they're not going to make...

GREENBERG:

If you can't manage your own expectations...

(LAUGHTER)

CRAMER:

No, I -- you're right there is. But know if you miss a quarter it's dangerous to buy.

BUTTNER:

OK, gentlemen, the best is yet to come. Because when we return, not only do we get your predictions about what's ahead in the business world, but we're also going to see how some of your past predictions have worked out, right after this.

BUTTNER:

Welcome back.

So the guys who give the predictions every week are in the hot seats now.

Let's go to the TSC scoreboard to find out how right or wrong their forecasts have been.

OK, Jim, let's start with you. On August 14th you said that Intel (INTC) is heading to $100. Since then the shares have gone from 79 and 3/4 to 84 and 5/8. That's a pretty decent gain. Do you still think it's going to hit the century mark?

CRAMER:

This one is going to be right as rain. You've got to be there.

(LAUGHTER)

GREENBERG:

Yeah, and in how long.

CRAMER:

We've had a lot of rain lately...

BUTTNER:

Well, what is the time frame? That is a good question.

CRAMER:

Well the timeframe is fast enough to the job.

(LAUGHTER)

GREENBERG:

Spoken like a true -- true trader.

BUTTNER:

OK, Herb...

CRAMER:

I'm long it and I love it.

BUTTNER:

... you're next. On August 28th, you predicted Net2phone's (NTOP) big gains would evaporate. Since then Net2phone's stock has fallen over 16 points, to Friday's close of just under 58. More pain ahead for Net2phone investors?

GREENBERG:

If this company doesn't make it earnings or its lack of earnings number, they've got big problems.

At least that's what my sources say.

CRAMER:

This is a red hot stock that has cooled.

BUTTNER:

Right.

CRAMER

: I think Herb is on to something.

BUTTNER:

OK, and Dave, in the wake of the CBS (CBS)-Viacom (VIA) merger, you said to expect another big media marriage soon. This week NBC bought 32 percent of Paxson (PAX). Not exactly a merger, but pretty close.

CRAMER:

And close enough, close enough for the editor-in-chief I think.

(LAUGHTER)

KANSAS:

More than close enough.

CRAMER:

That's a dangerous prediction...

KANSAS:

Close enough. Close enough.

BUTTNER:

Is that the last one, or is this...

KANSAS:

For now, yes.

(LAUGHTER)

BUTTNER:

OK, said with much conviction. Gentlemen, time to get your new predictions. Jim, you're up first.

CRAMER:

OK, these long distance companies, including Bell Atlantic, that you heard about earlier in the show -- stay away. They're going lower. You can't be in that sec -- it's not investible any more.

BUTTNER:

This has been a major theme for the market though. What happens there?

CRAMER:

It's over. There is too much price competition. I think these stocks are dangerous.

BUTTNER:

Herb.

GREENBERG:

My sources say that Coke Enterprises, Coca Cola Enterprises (COKE) -- the largest bottler of Coca Cola products - - will continue to lose its fizz.

BUTTNER:

And, Dave.

KANSAS:

Jim won't agree, but I think oil prices are going higher...

CRAMER:

Oh...

KANSAS:

... between now and the end of the year.

(LAUGHTER)

It's going to be cold...

CRAMER:

Cold -- oil. Why don't you just go into a cave.

(LAUGHTER)

BUTTNER:

All right. What about you? Do you agree or disagree? Let us know by going to thestreet.com/tv. There is a place there to vote for best prediction and leave your questions or comments about the show.

In any case, we look forward to hearing from you. So, let us know what you think.

And while you're there, check out the rest of the site.

Jim, Herb, Dave, myself -- Dave writing from the cave of course...

(LAUGHTER)

... dozens of others write columns and stories every day that will help you navigate through this difficult stock market with confidence.

And that does it with this edition of "TheStreet.com". We will see you again next week at the same time.

Until then, we hope you invest wisely.

END

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