Wall Street Euphoria, Not Mel Karmazin, Sends CBS Surging

The stock's recent success has more to do with market momentum than company fundamentals.
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I hear all these presumably bright Wall Street seers telling me that, the way things are going, they now expect the

Dow

industrials to hit 12,000 by the end of the year.

The end of the year?

The way things are going, who's to say the Dow won't be hitting 12,000 by the end of June? At the beginning of March, the stock market stood at barely 9,300. Two-and-a-half months later, it stands at more than 10,900. That's more than a 17% rise in scarcely 10 weeks' time, which is why I say that, given the way things are going, another 17% rise would put the Dow at 12,789 by the end of July -- at 14,998 by mid-October -- and at 17,588 by the millennium.

Old fuddy-duddies like

Barton Biggs

-- with whom I, for one, happen to be in total but increasingly isolated agreement -- keep turning up on

CNBC

to remind the disinterested that markets don't move in a straight line and that this is all going to end very badly. But skeptics like Mr. Biggs are beginning to sound like gold-bug cranks and people who save Confederate money. The market has steamrolled every single one of them.

In a minute, we'll take a look at a prime beneficiary of all this --

CBS

(CBS) - Get Report

, a company in a stagnating business in long-term decline: broadcasting. Even so, CBS stock has more than doubled since last October and is now selling at 105 times estimated 1999 earnings of 44 cents per share, with a lousy balance sheet to boot.

Why? I know what the bright folks on Wall Street say. They say the company's new president and chief executive, radio guy

Mel Karmazin

, is orchestrating a turnaround at the company, and that things are now looking up at the tarnished old Tiffany Network. And, for all I know, they're right. But I also know that the real reason CBS has doubled since October has more to do with the euphoric state of mind in the stock market than with the company's improving fundamentals -- which mainly trace to its recent heavy move into AM radio, where operating profits in 1998 were up 45% over year-earlier levels vs. stagnation at the network, the TV broadcast division's crown jewel.

There is, I can say with some confidence, virtually no sector of the market left, with the possible exception of the utilities and fixed-income sectors -- and I'm not even sure about them anymore -- in which fundamental research is now determining value. Nor is that likely to change as long as the current market psychology stays intact (and who knows how long that will be). Value investing will return, that's for sure. And when it does, a stock like CBS may be selling for a fraction of its current price. But before that happens, CBS could be selling for -- oh, just pick a number -- twice its current level, three times? Who knows? Who cares!

As I have argued more than once in this space, this whole thing is happening because the entire stock market has been hijacked by momentum investors -- of which so-called daytraders are but the latest, most egregiously visible example. The way a market is supposed to work, at least according to the economists, is this: When the price of something falls, demand for it is supposed to increase, and where the two lines of falling price and rising demand intersect, you're supposed to get the market-determined price for whatever it is you're talking about.

But that formula doesn't work when demand for something rises only when the price also rises. And that, as it happens, is what momentum investing is all about: buying a stock only when its price is rising. As a result, stocks go up because -- well, because they go up.

People who are in the know in this game tell me that the man who thought the whole thing up -- or at least popularized it in its current '90s-era form -- is William O'Neil, the fellow who owns and publishes

Investor's Business Daily

. His key concept: Buy only those stocks that are making new highs and just forget about the "value" lurking in out-of-favor stocks in out-of-favor sectors.

Hedge funds and mutual funds all over Wall Street now trade in this way. On top of that, we have now seen the arrival of tens of thousands -- and soon probably millions -- of individual daytraders, all of them trying to do exactly the same thing over the Internet. In this game, fundamental research into a company's business process just gets in the way. The stock market heroes of 1999 don't care what a company does, or what its earnings prospects are, or how well or poorly management does its job. All they care about is how often the company gets mentioned on

CNBC

, or is talked up in Internet chat rooms, or makes a new high on some three-minute stochastics chart. Those -- and not price-earnings forecasts or cash flow projections -- are the buy signals of 1999.

Which brings us to the situation over at CBS, a company that looks great -- and will probably soon be looking even better -- from a momentum trader's perspective, but which looks pretty ordinary from a value investing point of view. But as I say, momentum traders don't care about that -- they just want to see

Maria Bartiromo

standing on the floor of the

New York Stock Exchange

with those pouty, full lips of hers, screaming over the din, "This just in -- Jessica Reif Cohen at

Merrill

has upgraded CBS to a strong buy, and the stock has been halted for an order imbalance. Back to you, Mark." From such little riffs millions are being made all over the world every second of the day.

It wasn't always this way with CBS. As you'll doubtless recall, by the time Laurence Tisch took over the company, in 1987, from its aging founder, William Paley, CBS had evolved into a sluggish media conglomerate with interests in everything from TV broadcasting to radio, to publishing and sports. For a time, it even owned the

New York Yankees

.

But once having ensconced himself in the corner office, Tisch proceeded to gnaw every bone in the company clean. Then in 1995, he dropped the carcass at the feet of Michael "Hot Air" Jordan, the head of

Westinghouse Electric

, and departed. For most of the four years since his departure, the heart of the business, CBS Television -- which accounts for half the company's revenue -- just drifted, as Jordan busied himself with bailing out Westinghouse's industrial operations, buying into cable operations like the

Nashville Network

and an AM radio business, and brushing up on how to make small talk with the Hollywood set. Meanwhile, the network languished in the ratings cellar with such den-emptying fare as

Diagnosis Murder

and

Promised Land

(a P.C. family on the lam, or some such).

It was, in fact, Jordan's foray into AM radio that now holds out hope for the future of CBS, even as it has brought his own future at the company to an end. The die was cast at the end of 1996 when Jordan paid $4.9 billion in CBS stock to acquire the radio network built and run by Karmazin:

Infinity Broadcasting

(INF) - Get Report

.

As a result of the deal, Karmazin became CBS's largest shareholder, which Jordan soon found out was like having lunch with Jeffrey Dahmer. Within months, Mel had taken control of not only the radio network but CBS's 14 owned-and-operated TV stations as well. By last October, Jordan was history -- whereupon Mel moved in, got himself appointed president and chief executive and began micro-managing a cost-cutting turnaround that has the place reeling. You can find all this lovingly detailed in a recent issue of

Business Week

, which quotes sources at the company saying Mel's begun going over underlings' expense accounts, canceling magazine subscriptions, nixing luncheon vouchers and earning for himself the endearing epithet of "Mad Mel."

Karmazin does, however, seem to be putting some numbers on the board: 2 cents per share of net for the fourth quarter of 1998 vs. the Street's consensus expectation of zero from Jordan, and 4 cents per share for the first quarter of 1999 vs. an estimate of half that much if Jordan had stayed on. Overall, Wall Street now expects CBS to earn 44 cents per share in 1999, and 78 cents in the year 2000 -- mainly from growth in the radio division. And those numbers have been all it has taken to get Big Mo behind the stock, which began climbing the very instant Mel took over last October and now stands at more than 45 per share.

But is CBS really worth it? At 45 per share, the stock is selling for 57 times next (repeat, next) year's earnings, which -- incredible though it may seem -- makes the company a more expensive investment than even

Microsoft

(MSFT) - Get Report

-- a business with no debt, $20 billion of cash in the bank, a 97% gross margin, a 40% net margin and a track record of 13 years of uninterrupted double-digit earnings gains. What's CBS got to go against that? One-third the revenue, nearly two times as many employees, $2.5 billion in long-term debt, negative cash flow and no tangible net worth.

Every trend in the company has been moving in the wrong direction -- not just for a year or two but for an entire decade. Which, I submit, is plenty long enough for a sense of being in decline to become imprinted in the corporate DNA. The company's revenue is now half what it was in 1989. Even so-called EBIT -- earnings before interest and taxes -- is down by a third from 1989 levels.

Whether Mad Mel can scare CBS into doing better remains to be seen. But the very company he ran until not so long ago -- Infinity Broadcasting, a portion of which CBS spun off as a stub IPO last December -- is now selling for "only" 52 times year-ahead earnings, which amounts to a discount from CBS's own multiple. And don't forget, the most valuable thing in CBS -- indeed, the only thing that gives the company any claim to growth stock status -- is Infinity itself. Clearly, there's a mispricing at work here: The most valuable part of CBS is being priced for less than CBS itself.

But none of that matters in the current climate, because an analysis of this sort has no bearing at all on a stock's price anymore. In fact, I would venture to say that if Mad Mel went back to wherever he came from and spent the next year doing nothing but swearing at nuns and throwing rocks at blind people, the value of CBS would still keep going up -- and up -- and up.

Christopher Byron's column appears in the New York Observer, and he also writes a Wall Street and investing column for Playboy. He is the former assistant managing editor for Forbes, the Wall Street correspondent for Time and the Bottom Line columnist for New York. Byron holds no positions in any of the stocks discussed in his column. While he cannot provide investment advice or recommendations, he welcomes your feedback at

commentarymail@thestreet.com.