Matrix Asset Management's David Katz 2.15.02

(v. 4, i. 4 2/15/02)

Taking The Plunge Matrix Asset Management's David Katz Says It's Time To Buy
David Katz, the founder and CIO of Manhattan-based Matrix Asset Management is a confident guy. Not cocky and obnoxious, but confident. His is the kind of confidence that allowed him to stick with his firm’s value discipline even at the height of the dot.com mania, and then to dabble, quite profitably, in tech detritus after the herd declared it toxic waste. Yet when I spoke with Dave in early January, he was uncharacteristically tentative; just couldn’t summon much enthusiasm for anything in his portfolios. But what a difference a few weeks, a few scandals, and market retreat made. When we spoke again late last week, Dave was brimming with ideas and eager to share. KMW David, now that the headlines are full of wrack and ruin, you’re putting money to work? That’s the way it works. We like the outlook for the next 12 months. We thought it was okay favorable a few weeks ago, but in light of the very sizable overall correction and, more specifically, the number of stocks that got caught, we think the table is set for some very favorable recoveries—returns. You’re not worried that the bad news will become relentless, now that Congress is getting into the act? We absolutely expect more bad news. But generally, at the tail end of a recession, bad news and company-specific problems are a lagging indicator. So is the new focus on balance sheets and fundamentals. At the end of a recession, problems are going to be more pronounced. But the market is going to muddle through, and if you are buying solid companies that are going to be the leaders in the recovery, you’re getting some good prices. And you have figured out which those are? We hope. How? At Matrix, we use a number of different quantitative business models, which look at a company’s historical earnings, cash flow, price-to-sales measures, return on equity, book value. From those, we determine what a businessperson would pay to own and operate the entire company. We then look to buy businesses at one-third off. That determines a basket of statistically cheap companies. At that point, we do detailed qualitative work. Go through the financial statements, speak with management of the company. We’ll then speak with competitors, if we feel it’s appropriate. Then we’ll speak with Wall Street analysts to make sure that we’re not missing anything in our analysis. In the end, we’ll make a determination whether it is a good long-term business, is focused on enhancing shareholder value and are we getting it at the right price? You crunch a lot of numbers for yourselves? Absolutely yes, and one thing that is critical is a detailed balance sheet analysis. We try to get a good understanding of a company’s accounting conventions. That focus has been very helpful in avoiding lots of problems over the last few years. So you don’t rely on merely screening pre-digested numbers posted to a database? No. In many of the recent disasters, the analysts, by and large, knew that the companies were engaged in very aggressive accounting. But just swallowed the numbers whole, anyway. Thank you! Yes. That’s clear. In most cases, the analysts simply gave the company the benefit of the doubt. If you listened to the Enron conference call before everything really hit the fan, there were some pointed questions. People definitely knew that the company was engaged in very aggressive tactics. But the company was so brazen about it and so punitive to anybody who asked questions that I think that everybody assumed that they knew what they were doing. So they simply said, “Okay. We’ll buy into it.” Why not? It was reporting growth and the stock’s momentum was in the right direction. Besides, it gave many Wall Street houses very significant revenues in a tough environment. No kidding. If anybody was left out of that food chain, I’m amazed. They covered all their bases. As many of the bigger companies these days do. The jury is still out on Tyco (TYC). But there was an article in the last few days talking about how many investment banks are involved in their break-up plan. That surely gives the many analysts at these investment banks a clear incentive to be helpful to the stock. Perhaps a big reason why they came up with the plan in the first place. If you have followed Tyco over the years, it’s somewhat suspect. When you’re engaged in a roll-up strategy, you get to hide a lot of your problems—as long as you continue to buy companies at an aggressive clip. Which can continue as long as the market values your shares highly, providing you with a premium currency with which to make those acquisitions at prices accretive to earnings. Yes. Historically roll-ups have not ended up pretty, and Tyco doesn’t seem to be progressing in a favorable direction either. No, and Wall Street never learns. That will always be the case. But it’s very important to remember the problems because that truly protects you going forward. There’s no little irony, for instance, in recalling who the accountants were for an earlier, ultimately disastrous, roll-up, Waste Management: Arthur Andersen! At least WMX was more straightforward than Enron about the real nature of its business— Yes, that’s true. I take it that Tyco isn’t one of the stocks you’ve been scooping up here? We’re not. Statistically, it’s attractive, but we have a lot of questions about the true margins of the business in a normal environment. It’s going to be difficult when they split the businesses up. A lot of them are not wonderful businesses in terms of long-term growth. It’s going to be a fairly complicated process. They recently were very forceful in saying they’re not going to have balance sheet problems; they’ll be able to muddle through this, and the key is selling off the CIT Group. The sooner the better on that score, but there are so many other companies out there with much better fundamentals, many fewer questions, in which you could make a lot more—without the risk. In what? I know that unlike a lot of value guys, you don’t steer clear of techs— We’ve owned a lot of technology stocks over the last few years. We generally did quite well on the upside and we’ve been very protective on the downside in a poor market. In part, because we avoided some stocks we thought were going to be problems. The telecommunication equipment companies, for instance, the Ciscos (CSCO) of the world, the JDS Uniphases (JDSU), made significant acquisitions and boosted reported earnings by writing off the costs of the acquisitions early on. But eventually you have to pay the piper. As business slowed in their industry, a lot of these acquisitions surely turned out to be not as good as they had appeared on paper. The upshot was that in ’99, when technology was hot we kept pace—or actually outpaced—the Nasdaq by a pretty good clip. I think the Nasdaq was up 88%, while the technology portion of our portfolio was probably up 100%. Then in 2000, when technology sold off about 40%, we were down about half of that. Last year, through very timely buys during the September sell-off, our technology investments were actually up about 5% for the year, compared with the NASDAQ being down about 20%. So paying attention to fundamentals, making sure that companies have earnings and cash flow, definitely helps in technology as much as it does in any old economy-type company. And those strong technology gains helped us achieve very favorable overall results in 1999. When technology fell sharply in the following two years, the other areas of our portfolio—financials, drugs/medical products and old economy—kicked in nicely and allowed us to produce positive returns in 2000 and 2001. Most importantly, our constant deployment of our opportunistic value approach has resulted in us comfortably outpacing the S&P 500 over the past 1, 3, 5 and 10 years. As I recall you tend to define technology a mite differently than a lot of folks. Well, a tech analyst probably would have looked at our technology portfolio in ’99 and declared half of it old economy and not technology at all. Because you insisted on things like earnings and cash flow? It lacked sizzle, but our mandate is to make money for our clients while controlling risk. Which is what you suddenly now think you can do in a lot of washed-out stocks? We definitely believe so. It’s important to put the market in perspective. You’ve had back-to-back negative years, which doesn’t happen too often in the market. The bear market through September was the third worst, in terms of duration, in the last 50 years and the second worst, in terms of magnitude, if you’re looking at the S&P. Things have been pretty bad out there. You had a strong fourth quarter recovery, which took a little bit of the upside away, but in the last few weeks, you gave a lot of that back. We think it’s very comfortable to step into the water here. Nobody knows what happens next month, but we see a lot of names that will be meaningfully higher a year from now. Are you concentrating on particular sectors? The things we’re finding most attractive now fall into three or four groups. First, financials, then technology. We’re also finding select retailers interesting, and we’re even feeling pretty good about some drug companies that have had a very dismal 15 months. They have been giving investors uncharacteristic headaches. As a result, many drugs’ P/Es are now in the teens, well below the market’s P/E multiple, and that rarely happens. Haven’t you heard? They’ve lost it. They don’t understand how to find new drugs in this biotech era and their bottomless well of cashflow is running dry, with so many of their legacy drugs coming off patent. As Santana said, “Those who forget the past are destined to repeat it.” Many of the same things that are being said about drugs today were said five years ago, 10 years ago and 20 years ago. When the R&D pipeline looks poor, there’s always something that surprises and all of a sudden re-ignites the pipeline growth. Likewise, when the pipeline looks great, rest assured it’s usually not going to be as good as everybody thinks. At this point, everybody has given up on the drugs; believes the industry is never going to be as hot a growth area again. We don’t know if it will be as hot, but it surely will be better than people are giving it credit for. Which are your favorites? For new money, Schering-Plough (SGP) and Merck (MRK). Schering has had significant issues in the last year and a half, which have driven the stock down about 40%. Yet it was a Wall Street favorite. You could not hear an ill word about it 18 months ago. Always a bad sign. Yes. Today, not one of those people who loved it 18 months ago is willing to talk about it. They had meaningful FDA issues. They have some issues relating to Claritin coming off patent. There were questions whether Clarinex would be approved. They have muddled through a lot of these issues. They seem to be coming to terms with the FDA. It did approve Clarinex and Schering is trading at 17.5-18 times earnings. We think you’re getting it cheap enough that something favorable happens in the next year or two. In the last few years, we have been pretty fortunate in buying pharmaceutical companies that have fallen from grace. A year and a half ago, we bought Abbott in the 30’s when they had FDA issues, we bought Johnson & Johnson meaningfully lower, when they had some drug approval issues and we bought American Home Products into the Fen-Phen scandal. All did very well when they regained their footing and we think Schering falls into that school. And none of those companies had much difficulty passing your balance sheet and income statement tests. No. One of the nice things about drug companies, by and large, is that they have very conservative accounting and very strong balance sheets. Unless they’re Irish. That is the case in Elan (ELN). We definitely have not made any determination on it yet—and they did use ultra-aggressive accounting. At some point the stock may get cheap enough to be attractive, but the jury is definitely still out. “Ultra-aggressive” is the polite way to put it. But Elan’s research partnership games have been common knowledge for years. Nobody cared while the bubble was in full bloom. At that point in the market cycle, fundamental analysis was looked down upon. No kidding. Today it’s actually an asset. Our expectation is that there will be a trend back toward more conservative accounting, not by choice, but the market forces are going to push people to do that. Which will be a good thing overall for the equity markets. What about Merck? Merck has fewer issues with the FDA but they’ve got more major drugs coming off of patent. Again, 2 years ago, Merck was thought to have the best R&D effort in the world. They literally spend billions of dollars on R&D. But they do seem to have a new product gap in the next 12-18 months and a number of drugs coming off patent. As a result, for the first time in an exceptionally long time, Merck is going to have little to no growth in earnings in the coming year. But the stock has sold off from the 90s down to the high 50s. At current levels, you’re buying a blue chip pharmaceutical company at 18 times earnings. And there’s a good likelihood they’re going to hit meaningfully on some of their drugs. Plus, when you’re as large as Merck, you’ve got a lot of flexibility on costs. Management is not particularly pleased that the stock has done as poorly as it has. The announcement of the Medco spinout is a clear signal that they have every intention to enhance shareholder value. They’re going to do what it takes. They’re reevaluating their whole business to make sure that they can maximize value for shareholders. Do you expect to hold onto the Medco shares you get in the spinout? Probably not. We’ll evaluate what it’s coming out at, compare it to its peers. It would not be a knee-jerk sale from the get-go but if it gets fairly valued, it would probably go a lot sooner than the Merck would. By the way, we think there’s a good likelihood that at some point down the road, it would make a great deal of sense for Schering to be owned by Merck. In which case, our portfolio diversification would be lessened, but hopefully any deal would be struck at a favorable level. Unlike, I might add, Hewlett-Packard (HWP) and Compaq (CPQ). We have owned both since well before anyone contemplated putting them together—and that clearly has not worked to our advantage. What’s your excuse for that? A simple one. We don’t think that any sane person would take two large computer and technology companies and try to combine them to make a more successful technology company. Carly Fiorina isn’t going to take kindly to that comment. And there’s a first time for everything. It doesn’t mean that it can’t be done, but it surely means the odds are way against you. We fall into the Walter Hewlett and the Packard Foundation camp. Hewlett-Packard was not broken and just needs to be run better. It doesn’t need to go for a “Hail Mary” combination with Compaq. Unless you’re still stuck in the ’90s paradigm that it doesn’t matter how you grow as long as you grow, and acquiring growth through acquisition accounting is one of the easier routes. Insanity is doing the same thing over and over again and expecting a different result. In technology, big combinations generally don’t work. Occasionally, they’ll work on the pharmaceutical side, or in the telecommunications area. Hewlett’s and Compaq’s competitors are too happy about the proposed combination. Their customers don’t seem to be very happy about it. All of that doesn’t play well. We continue to own both and our hope is that the merger plan will be rejected by Hewlett’s shareholders. But who knows? Why own them in the first place? When we bought those positions, our sense was that the PCs and related areas were the first things to go in this technology depression. So there’d be more pent-up demand in them and they would be the first ones to come out. Clearly, you’re seeing signs that on the consumer side, PCs are actually picking up and had a better-than-expected Christmas into January. The corporate side has not picked up. But our sense is that there is going to be meaningful pent-up demand there and that’s also going to happen sooner rather than later. Plus, if you have a pure play in that area, people are going to forget that it’s cyclical. So as we start to grow out of this recession, investors are going to get pretty excited and bid both companies up to pretty good levels. Cross your fingers. I’m not sure that’ll happen as quickly, or as forcefully, as you’re anticipating. Are H-P and Compaq your favorite techs? We like both of them a lot. They’re both selling literally off the bottom of the charts, in terms of their historic price-to-sales or price-to-normalized earnings ratios. So we put that on a short list of techs that we’re excited about. What sort of bounces are you looking for, and when? If Compaq stays independent, it comfortably could be at 25-30 in the next 18 months. If Hewlett is independent, it comfortably could be at $35-$40 per share in the next 18 months. If the deal gets done, our target on Hewlett drops down probably to about 30 to 33, with much less conviction and also with a much higher risk profile. So if the deal gets done, simply for diversification and risk reduction reasons, we would have to take some of our position off the table. But other areas of technology are in fact a lot more exciting with much lower risk. So we like, for instance, American Power Conversion (APCC), which makes uninterruptible power supplies. How low has that angel fallen? It is currently selling at about $12.70, which is pretty close to the low. The stock was as high as 40 within the last 18 months. Their uninterruptible power supply units are usually used for PCs, servers or Internet sites. They have weathered this technology recession or depression in great form and have stayed very profitable. Their cash flow has been wonderful. Their balance sheet is wonderful. In contrast, the Sun Micros of the world, which have all the sizzle, have not weathered this as well. A dull company, like American Power, has made a whole lot of money during the slowdown and should be a full beneficiary as technology spending picks up. Right now, you’re getting it at a very attractive P/E ratio with a stellar balance sheet. As of yearend, American Power basically is debt-free, and has a ton of cash. But its growth rate is nowhere near what people were projecting when they were paying $40 for a share. It’s less exciting, but if you didn’t know its name and just looked at its historic sales and earnings growth, you’d be pleased with it. The fact they’ve muddled through this tough time in good form is a tribute to management. It will grow at a much slower pace than historically. We’re looking at anywhere between 10-15% annually, on average, but you’re buying it at 16 times earnings. So you’re not paying a whole lot for a 10% or 15% grower, and there’s always a chance that we are a little conservative in that estimate. Want to talk about another tech? This one is probably more exciting. Symbol Technologies (SBL), the bar-coding company. They also have had an enormous fall from grace. They were expected to grow at a breakneck pace and this year its earnings actually are going to be down—still profitable, not nearly what people expected. So the stock is down from the 40s into the mid-teens, about $13.50 a share. This one doesn’t look as cheap based on current earnings—but they’re depressed. But normalized earnings in a better environment could easily get back to 75-80 cents, so you’re not paying a lot for a market leader in a growth area. Even if Symbol Tech’s growth rate is closely tied to the pace of economic growth— It’s a growth cyclical, so if you buy it right, you make a lot of money. We would much prefer to own a company that grows over time. So if you fall asleep for 5 or 10 years and then come back, it’s worth a whole lot more. By contrast, if you buy a pure cyclical like a chemical company or a copper company or an automobile company, you’ve got to get your timing dead-right; make sure that you get in and out. Okay, but these aren’t exactly bleeding-edge technologies. We’re very happy with that. Each is a leader in their area, has wonderful market share and you’re not paying a premium for them. Unhappily in the last two years we’ve seen very painful examples of the fact that when a leading-edge technology skips a beat, you have 70% downside. One of the great things about technology—and one of the horrible things—is it changes very quickly. So what’s hot today is going to be cool tomorrow and vice-versa. But I’ll mention two more techs, one of which is pretty controversial: Motorola (MOT). It’s a serial turnaround. Or a soap opera. They, forever, have been expected to be in a turnaround mode. It actually looked like it was happening two years ago. That, it has been painfully shown, did not happen. Clearly, they’ve got a lot of issues. Some of their markets are slowing down or they’re not well positioned. But the company rarely sells below one times sales; Normally should sell at 1.5-2 times sales. They’re such a high-profile business and management has been under the gun for so long that they’re going to get their act together sooner rather than later, we think. In the meantime, the stock is not going a whole lot lower. They should have pretty good leverage in a technology recovery. What’s the other? This is a little off the beaten path: Kyocera, the Japanese ceramics company, capacitors. We were pretty successful with Vishay, which is a U.S. capacitor and resistor company, in similar markets. Business is particularly poor in Japan. While we’d love to own Vishay again, it’s a little bit expensive relative to where we would like. Kyocera, which has gotten hit by the fact that it’s a Japanese stock, that it’s in these dull markets and that it’s not a U.S. company, has sold off more than its rivals in the group. So we think is a low risk investment in technology. Again, a low-end technology play, but something that should be very profitable. How cheap has it been? It’s selling at about 1.25 times book value, about 1.1-1.2 times sales. It also should sell at about 2 times sales. It’s down from 220 to 55, so clearly, it’s taken a bath. The 220 was a crazy number, probably a more normal valuation would be 75-90 for it, and our target’s about $85. We started a partial position in it, as opposed to full positions in the others. So at this point, we don’t know if we’re rooting for it to go up or down. If it goes down, we will buy a whole lot more. Kyocera will obviously be helped if and when the Japanese stock market ends its 18-year losing streak. By definition, that market will not go down forever. It’s gone down so much. There are companies there that are now approaching okay valuations. We would not make a market bet, but surely we’re comfortable owning this name within that market. Okay, and you said you’re attracted to financials like a moth to a flame? I don’t recall using that analogy. That’s all yours! We see a lot of financials selling at great prices. You could probably throw a dart at the stock listings on a wall and find many of them. By differentiating among them you could do a little bit better. Some that have been hurt by the economy, by the Kmarts, the Global Crossings and the Enrons of the world, have sold off to valuations that imply they only lend money to bad credits. In a recession, if you are a big bank, you’re by definition going to be lending to bad credits as well as to all the good credits. Our favorites on the banking side are J.P. Morgan Chase (JPM), FleetBoston (FBF) and Citigroup (C). Clearly, Morgan has the most issues, uncertainties and problems, but it’s also selling just at an absolute fire-sale price. How do you figure? We look at them on a normalized earnings basis and also based on projected earnings. And on projected earnings for the upcoming year, they’re selling at about 10 times. On a normalized basis, they easily can earn north of $4 and that puts them at about 8.5 times earnings. In the spirit of “be careful what you wish for” they were a traditional bank and they wanted to become an investment bank. They arrived at the party exactly at the wrong time. That’s bad and that’s why the stock has done as poorly as it has. The flip side is, if you believe that the market is going higher and the economy is going to recover (and we’re comfortable with both of those assumptions), J.P. Morgan has the most upside leverage of the big banks because of their investment banking exposure and commitments and also their venture capital. If only something too big to hide doesn’t blow up in one of their derivatives portfolios or such. We definitely have concerns and we watch. But in Morgan, as in many of the big banks you are not going to know everything that they have in their portfolios. You’ve got to take a leap of faith to assume that management has been acting in a fiduciary manner. Besides, they do have to speak with government regulators on a regular basis to keep them in check. We believe that they have their act together. They have a very significant capital base. They generate huge earnings and huge cash flow, even in these difficult times. So we think they’re going to muddle through. But we won’t be surprised if there is another high-profile problem lurking out there, or if it turns out that J.P. Morgan, Citi and Bank America are lending to it. The bottom line is that all of these big banks were trying to do business with all these major corporations. And when these major companies have problems, rest assured everybody’s lent money to them. That’s the nature of being a bank and as long as you have adequate credit reserves (which they and the others do), you’re going to get through it. We would say that this difficult period is not going to be nearly as difficult or as problem-oriented as the early ’90s when a lot of banks were truly on the ropes. Let’s hope not. But clearly you could well get opportunities to buy those marquee financials even lower. Hopefully, we’ve bought them good enough already. Fleet Boston is our second one. They were also hit by a desire to get into investment banking. And they have a significant business in Argentina. As a result, they had a disappointing fourth quarter. All year the stock was selling at low levels to their current earnings and to their ultimate earnings power. There are a whole lot of acquisitions in Fleet’s past, too. A lot. There is a new CEO far more focused on harvesting all the benefits of the acquisitions and getting the bank better earnings and cash flow rather than just expanding the franchise. We would liken it to Bank America, which also has been very acquisitive. Our sense was that a year ago, they changed their focus to running the business better. They’re clearly doing that and focused on shareholder value now. And the stock has been one of the better-performing ones in the bank group. We think ultimately Fleet’s going to do the same. They’re pretty leveraged to a better economy and a better market. What other financials attract you here? As a corollary to the money center banks, we also think now is a reasonable time to be putting money back into the brokerage stocks. Our favorite there is Morgan Stanley Dean Witter (MWD), which has muddled through this very poor environment in good form. It sells at about 14 times earnings. It still makes a very healthy ROE and should be one of the leaders coming out of the slowdown. We are looking for the stock to return to the high 70s, low 80s. There’d be a pretty good chance that if it gets there, it would go higher. But we think you can see the 70s-80s in 12-18 months. Lastly, within the brokerage area, we like a smaller-cap, Knight Trading (NITE), which was a hot stock amid the Internet and tech mania. They’re one of the country’s largest market makers. But the stock has been hurt very badly in the Nasdaq sell-off. The stock is down from the 40s into single digits. It’s also been the target of considerable—and well-deserved, if overdue—regulatory attention. The highly unfavorable and expensive sort. They did have a settlement. Big in dollars, but not big relative to their assets. Clearly, they did some things that pushed the envelope in a push-the-envelope era— They did a lot worse than “push the envelope.” Clearly, that’s changed. Their balance sheet is rock solid. When you’re a brokerage organization, your assets are generally liquid assets. They’ve got north of a $6-$6.50 book value, so they’re selling at a 20%-30% premium to book. We think that it will be a significant beneficiary of an improving market. We also think that the economics of the over-the-counter trading industry are actually going to be better, rather than worse, going forward. The move to decimalization was a significant negative for Knight and hurt their profitability a lot. Recently one of the major brokerage firms started to charge commissions on their over-the-counter trading. We think that raises the bar for the whole group and allows everybody to be a little bit more profitable. We also suspect that at some point it might make sense for a bigger player to acquire Knight for a very quick entry into over-the-counter market-making. If that were the case, we think the stock would command a valuation somewhere in the mid-teens, $15-$16. So you do sometimes hope for a greater fool! You skipped Citigroup. Are you having second thoughts? No. Citi happily has gone through a very tough time for the economy and the markets and continues to make very good money. The CEO is obsessive about leading the company well and enhancing shareholder value. When you have to answer to a CEO with that as his objective, you tend to run your business a little bit better. They have all the problem areas these other guys have. Exposure in Argentina. Lending to Enron. But their businesses have been powerful enough to so far outweigh the problems. It is probably one of the best financial services company in the world, surely in U.S. and you’re paying 14 times earnings for it. That’s a good balance to a more risky position in J.P. Morgan. Citi probably has less upside, but also should have a lot more controlled downside risk. So which retailers are you dabbling in here? Generally, we don’t like retailers. If you are going to get involved with retailers, you want to be very confident that the company has an edge on its competition and has the financial strength to muddle through a tough time. Our lower-risk investment in that area is CVS (CVS), the drugstore retailer. It, historically, has been a Wall Street favorite. It has always commanded a 20-30 P/E. A premium to the S&P. But they ran into a lot of problems last year with store expansion, with inventory management, with pharmacist shortages. If it could be a problem, it was a problem. As a result, the stocks sold off from the $40 level into the mid-$20s. You’re now six months into the problem period. They recently announced earnings. One thing that came across clearly in the conference call is that management feels that they have their arms around the problems and are on the mend. Yet the stock is not selling at a terribly different price than when they identified the problems and significantly lowered expectations. Investors are saying “Show me.” Our sense is that they have turned the corner and you’re buying in the mid-20s a company that should return to the high 30s, low 40s over the next 12 months. Our other retailers, is a riskier investment and a little more controversial. The Gap Stores (GPS). Make that a lot more controversial. If you go into the stores, you’ll see that not many customers have been in there lately. But Gap is one of the largest purely clothing retailers. They have had, over the years, very savvy management that has grown the business well. That has been able to get a good pulse on what the consumer wants. That’s history, it seems. About a year and a half ago, they acknowledged that they were confronting a lot of issues. They had grown a little bit too fast and the management ranks were not where they wanted them to be. They engaged in fairly significant management restructuring and re-engineering. As a result, they had some very significant product mix changes in the last year. Their same-store sales have been dismal and 2001 earnings were very disappointing. What’s the good news? We do think that the company has its cost structure under control, has very good distribution. Their management structure is vastly improved. The last piece of the puzzle is that they need to actually get products into their stores that consumers like again. No minor detail, that. Critical, if you’re a retailer. We do think that they’ve figured out many of their shortcomings in the last year and there’s a pretty good likelihood for success within the next 6-12 months. Plus, Gap is a stock that people want to own. Historically, when their comparable store sales have turned positive, the stock has had very meaningful moves in very short periods. In fact, we have been buying Gap for the last 6 months. But prior to that, we had bought and sold it for a 50%-plus profit, twice. Once at the end of 2000, when we sold it about a month and a half later, after their comp stores turned positive and the stock had a great run. Then, about 3 months later, after it had dropped as the same-store sales turned negative again, we bought it back and held if for another 50% pop. So you’re not averse to doing a little trading these days? We generally are not traders, by the nature of our investment style. But if the market is going to give us 50% for a company in the short order, we’re happy to take the profit. What’s your more normal holding period? Generally we hold stocks for 1 to 3.5-4 years. Gap is the exception to the rule, rather than the rule. The one concern that we have with the Gap, and it is a big concern, is that they are able to muddle through this difficult time with their balance sheet intact. But we think that management knows that they’ve got to satisfy the bankers. And with their new capital spending plan and the fact that their debt, on a dollars per share basis, is not that significant, they should muddle through. They might have to pay higher interest rates this year, but if they can get better products into the stores, their customers absolutely should give them the benefit of the doubt and start buying again. Thanks, David.
		"Paying attention to fundamentals, making sure that companies have earnings and cash flow, definitely helps in technology as much as it does in any old economy-type company."









		"We think it's very comfortable to step into the water here. Nobody knows what happens next month, but we see a lot of names that will be meaningfully higher a year from now."