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Lessons From Wall Street's Turkey Farm

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate merits of individual stocks.

It's time for those who got sidetracked by some wild highfliers to relearn a few basic rules of investing and economics.

November 28, 2000|JAMES PELTZ and MICHAEL HILTZIK

Mike: Well, Jim, last week I was sitting around with my belt loosened because I was bursting with turkey . . .

Jim: And you got to thinking about the stock market?

Mike: Yes, it occurred to me that the number of corporate turkeys this year have been pretty thick on the ground. In fact, you can't walk down Wall Street without tripping over them. So I decided we should take inventory of the market's turkey farm to see what lessons can be learned.

Jim: Good idea. Now, our readers might wonder why we want to talk about stocks that nose-dived this year. I mean, they're looking for stocks to buy, right?

Mike: Yes, but investing wisely means knowing what to buy, and also what not to buy. And as they often say in Silicon Valley, you learn from your mistakes. In fact, a lot of people in Silicon Valley have had a lot to learn this year.

Jim: Right, the point being that when you're evaluating a stock, it helps to learn how to spot the red flags that should make you think twice. But sometimes you have to learn the hard way.

Mike: True. Let's be honest: You and I haven't escaped this year without a few bloody pecks from turkeys of our own. They looked like beautiful swans when we recommended them, but underneath all that white plumage were some rotten birds.

Jim: Are you done mixing your metaphors today? Anyway, how about if we start with Lucent Technologies [ticker symbol: LU]. The directors of this huge maker of telecommunications equipment, after seeing the company stun Wall Street quarter after quarter with lousy earnings, recently fired CEO Richard McGinn.

Mike: Not a moment too soon; he had lost all credibility.

Jim: Lucent's transformation into a turkey was shocking. When the year began it was riding high, with the stock in the $70s. Now it trades for less than $17, and an incredible $200 billion of investors' paper wealth has gone up in smoke.

Mike: Every quarter, investors were led to believe that things were looking up, only to have Lucent say "Whoops, guess what? We've just discovered things are looking down again." You know, the DNA guys must have cloned this particular turkey, because such serious setbacks have happened at company after company this year.

Jim: And in all sorts of industries, not just telecom. The lesson for investors is that if you see a company come up short in sales or earnings one quarter, sit up and pay attention. Because a lot of Wall Street analysts took Lucent at its word, and kept recommending the stock.

Mike: Good point. Wall Street analysts these days are easily had, and they believe what they hear. I'd argue that many don't do original research, because the basic structure of business on Wall Street today militates against analysts speaking their minds.

Jim: They have a conflict of interest.

Mike: The same brokerages that employ the analysts have other departments, like stock underwriting and mergers advice, that are trying to sell services to these companies. So if you're trying to float stock or bonds for Lucent, God forbid that your analyst suddenly declares: "Lucent stinks!"

Jim: Now, given Lucent's long track record of excellence--until this year--I can see why investors might have hung in with the stock.

Mike: I know. You're talking with someone who owns Lucent, which is my way of making a very embarrassing disclosure.

Jim: In any case, Lucent certainly isn't the biggest stock turkey of the year. That, collectively, has to be the "dot-com" stocks. As everyone knows, the whole Internet stock craze just collapsed this year, as well it should have.

Mike: And to think that, right up until March, we kept hearing that the dot-com stocks represented a new paradigm: The old rules of investing and of economics had been repealed, the bulls said.

Jim: It was just a new platter of baloney. The lesson here is that all of the basic tenets that make for a good stock--consistent profit growth, a healthy balance sheet, strong management, knowledge of your market--were and are still intact. Investors just got sidetracked by the Net-stock craze, as they have before by other fads.

Mike: It's pretty amazing to see the carnage. Garden.com [GDEN], down 98%; DoubleClick [DCLK], a company that sells ad space on the Web, down 88%. And on and on.

Jim: You know, when dot-com mania was in full bloom, I'm sure many investors who had always followed the traditional rules of investing thought the train had passed them by. It must have been hard to listen to Uncle Joe bragging about how he was making money hand over fist trading Net stocks.

And there was money to be made, for a while. But who's laughing now?

Mike: That brings me to our next turkey, NetZero [NZRO], a purveyor of free Internet service. Now, the ballgame for this company was in accumulating an audience . . .

Jim: . . . basically building a huge group of users.

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