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Why Banking Analyst Tom Brown of Tiger Doesn't Like Big Banks

Also, a Watson wallop, another Delia's dollop and Sepracor slop.

Earlier this week, for no apparent reason, I tried to remember where banking analyst Tom Brown had gone. Darned if on that very day, as if on cue, Johnny on the spot


didn't mention in his

column that Brown had gone to Julian Robertson's

Tiger Management

. Strange, Jim, very strange. (The

story was reported here on


about a year ago.)

Tiger is known for its value-oriented approach to investing. Sounded perfect for Brown, who was known for enthusiastically endorsing what he believed were undervalued, low P/E bank stocks. His BofA call years ago, back when


was treated as if it had the plague, was a classic.

So, I called Brown, expecting to hear the same old institutional gibberish, and what a surprise -- no, make that


to hear him talk about his current faves. What he's


buying is big banks. "All it takes is spending a half day visiting the management of

Bank of America

(BAC) - Get Bank of America Corp Report


Capital One Financial

(COF) - Get Capital One Financial Corporation Report

, and

you see that the P/E gap (19 vs. 35) isn't wide enough," he says.

Now, Brown is fond of saying, only half in jest, that the higher the P/E, the better. His firm's holdings include Cap One and

Providian Financial


. (Yep,


Providian, even with an alleged investigation into its sales and debt-collection practices.) Big banks, he says, simply don't get it. Rather than focusing on how they were doing their business, they were busy merging in what, he says, in retrospect were mostly "bad financial deals."

Proof: The buyside analyst keeps a chart above his desk tracking earnings estimates of 11 of the largest merged banks. Only one,

Wells Fargo

(WFC) - Get Wells Fargo & Company Report

, boasts a consensus earnings estimate that is higher than it was at the time of the deal. Estimates for the others are at least 10% below where they were at the time of the mergers.

The reason, Brown says, is what he calls "the incumbency problem." To move from the "old way" of doing business to the "new way" requires "a new way of thinking." But that's "too risky" for many bank CEOs, he says.

"If you're the CEO of one of these companies and you're over 55, there's a lot you don't understand." He jokes about how embarrassing it is to hear the CEO of one of America's largest banks (hint, hint) talk about the Internet.

Instead, in addition to Cap One and Providian, Brown is taking a close look at companies like







Telebanc Financial



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"People look at Cap One and say it's a credit card company," he says. "But I agree with what they wrote in their 1996 annual report, when they said, 'We're not a credit card company; we're an information-based marketing company.' Did you know they're now the largest reseller of cellular telephone services." (Uh, no.) "And E*Trade isn't a brokerage firm, it's a technology company that views discount brokerage as content, and they'll sell other content."

Brown compares what's happening in financial services today with what happened to retailing back in the '80s. He recalls how one retail analyst used to downplay the potential of


(WMT) - Get Walmart Inc. Report

, saying that when it ventured out of rural areas into the big cities it would get crushed by Sears

(S) - Get SENTINELONE, INC. Report

. "She didn't realize the changed way retailing was being done," he says.

So, how can an investor avoid getting snookered by a high P/E? As long as the P/E is below the growth rate, and management has shown potential to move quickly, Brown is happy. "Reinventors truly understand the importance of intellectual capital," he says. "Banks don't get that."

That's why he's still hanging on to his Providian. Within two days of the disclosure of a possible investigation, the company issued a statement saying that it was changing the way it did business.

"Reinventors have to build for constant change," Brown says. "CEOs of banks I cover think that once they develop a Web site they're done. Reinventors recognize the game is never over."

But right now the old guys dominate the new guys sizewise, which must be why I'm still doing my banking offline! As are most of my friends.

Short Positions

My dear Mr. Watson:

Last time we left Watson Pharmaceuticals


the company had been the target of scrutiny by the


for shoddy production practices at its main plant in Corona, Calif., where the company produces a generic version of the painkiller Vicodin. The FDA was concerned that the company had been trying to hide data about rejected batches of the drug. The company filed a response, to which the FDA filed its own response. That response was picked up by investors who filed a Freedom of Information Act request. It shows that the FDA disagreed, often quite strongly, with 42 of Watson's 84 responses. Worse, the FDA said Watson will be in the

penalty box -- it may face delays -- for any new product approvals until the problems are resolved. That can't be good for a generic drug company whose story, in part, is based on new product approvals. Watson officials were unable to be reached.

Analyst antics:

And you wonder why analysts from firms who have an underwriting relationship get such a bad rap? Consider the case of



, the catalog retailer of clothes for teenage girls, which is no stranger to this column. On Feb. 11,

First Union Capital Markets

analyst Kelly Armstrong placed the company on her firm's "analyst action list" with a "buy" recommendation after meeting with management and visiting the company's first retail store. She was so wowed that she put a 30 cent per share earnings estimate for the current fiscal year. So, here we are six weeks later, and Armstrong, whose firm has no investment banking relationship with Delia's or its



spinoff, has had a change of heart. While reiterating her outperform rating, she now expects the company to lose 31 cents rather than make 30 cents. Seems the catalog biz is getting hurt more than she expected by the Internet.

Meanwhile, Joe Grillo of

BT Alex. Brown

upgraded Delia's three weeks ago to a buy from market perform, with an estimate of a 14 cent per share loss for fiscal 2000. Can't blame him: His company led the iTurf deal. The real test of how thick the Chinese Wall is at BT Alex. Brown between bankers and analysts, though, is whether he's willing to downgrade the stock or get in a financial limbo contest with Armstrong, by at least matching her lowering of the bar.

His take? "I'd prefer not to comment or be quoted on Delia's," he said. (Sounded as if I was the very last person he wanted to hear from and/or talk to. Imagine that.)

Sepracor slight?:

In an item yesterday, analyst Jordan Kimmel was quoted as saying that



management didn't own any stock. That prompted reader

Robert Macek

, from Ann Arbor, Mich., to accuse me of shoddy journalism because Sepracor's management owns 7.4%. You're right, Robert, they do. Kimmel's explanation: With a developmental stage biotech company, 7.4% might as well be nothing.

Lernahoulian alert:

Sorry, nothing today.

Herb Greenberg writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at Greenberg also writes a monthly column for Fortune.