Street Capitalist: Event Driven Value Investments

In an ideal world, managers at corporations would listen to the ideas that shareholders bring to them. After all, the shareholders are the true owners of a company. Usually though, egos start to fly and things don’t work out that way. When that happens, shareholders often utilize proxy contests in order to replace members of the board of directors and make their voices heard. The problem is that these proxy fights are messy and expensive. You have to obtain extensive legal council and take on the costs of actually mounting a campaign to distribute ballots and get votes yourself. For smaller investment funds the fight just might not be worth it.

The reason I bring this up is that there seems to be a little controversy regarding Sardar Biglari’s reimbursement of $500,000 from Steak N Shake (NYSE: SNS) while also serving as CEO of Steak N Shake (and taking a salary).

In connection with his appointment as Chief Executive Officer of the Company, Mr. Biglari’s annual salary was increased to $280,000. There is no other plan, contract or arrangement to which Mr. Biglari is a party or in which he participates that was or will be entered into, or any material amendment to such a plan, contract or arrangement, in connection with Mr. Biglari’s appointment as Chief Executive Officer. Mr. Biglari does not receive board fees or any other compensation.

On August 6, 2008, the Company’s Board of Directors agreed to reimburse Western Sizzlin and the Lion Fund for expenses related to this year’s proxy contest in the amount of $500,000. Mr. Biglari serves as the Chairman and Chief Executive Officer of both Western Sizzlin and the Lion Fund. This expense reimbursement is being disclosed pursuant to Item 404(a) of Regulation S-K.

Form 8-K for STEAK & SHAKE CO (Yahoo!)

While this looks sketchy, it’s not. Back in January, Biglari publicly disclosed that he would be seeking reimbursement for expenses incurred by having to wage a proxy contest with Steak N Shake. He says here:

The expense of soliciting proxies is being shared pro rata by the Lion Fund, Western Sizzlin and Western Acquisitions based on their pro rata share of the aggregate number of Shares held by all members of the Committee. Costs of this solicitation of proxies are currently estimated to be approximately $[________]. The Committee estimates that through the date hereof, its expenses in connection with this solicitation are approximately $[________]. We intend to seek reimbursement from the Company of all expenses we incur in connection with the solicitation of proxies for the election of the Nominees to the Board at the Annual Meeting. We do not intend to submit the question of such reimbursement to a vote of security holders of the Company.

Preliminary proxy statements, contested solicitations (Steak N Shake)

Had Biglari pulled the reimbursement out of a hat, as a shareholder I’d be angered. But he didn’t. When he began his proxy contest with the company he publicly disclosed that he would seek reimbursement. If shareholders had disagreed with this, they could have voted in favor of company management.

In general, I like to see these reimbursement policies in play. They are enablers for shareholder activism which means that even in the micro-cap/small-cap area, we can see corporate management held accountable to their shareholders.

A great graphic that shows us the change in the number of credit cards worldwide:

via Outside U.S., Credit Cards Tighten Grip (NYTimes)

I have to wonder what the long term effects of credit cards will be in some of these BRIC/Emerging markets. On one hand, the increased access to credit will somewhat help certain individuals within an economy. It’s possible that you could see pockets of increased consumer spending. At the same time, like the article discusses - certain card holders could accumulate too much debt which could lead to protectionist measures by local governments.

The other problem that I see is that many of the countries reporting large changes in credit card numbers are ones with economies tied to the bull market in commodities. If that turns south you should expect credit card usage to go down as well.

Either way, it’s something worth taking a look at when trying to find positive tailwinds for your investments abroad.

This weekend I had the privilege of reading the new Robert Cialdini book Yes!: 50 Scientifically Proven Ways to Be Persuasive. I first learned about the book from reading and watching a few talks with Charlie Munger, Warren Buffett’s right hand man. Yes! is a great book, it showed me a lot of different ways that we see psychology being used - especially when businesses are trying to sell to us.

One of the chapters which stood out to me discussed an experiment on how companies report their earnings.

Fiona Lee and colleages suggest that organizations that attribute failures to internal causes will come out ahead not only in public percetption but also in terms of profit line.

They also suggest that the public response to an organization’s internal focus to explain failures might be to assume that the organization has a plan to modiy the internal features of the organization that may led to the problems in the first place.

So what does it look like when a company does not attribute failure to an internal cause?

From the Steak N Shake (NYSE: SNS) 10-Q:

During the second fiscal quarter, same-store sales declined 6.3% primarily as a result of a decline in guest counts of 8.8%. Our same store sales and guest counts were negatively impacted by multiple factors, including further deterioration in the consumer economic environment and increased promotional activity from competitors…

Rising unemployment rates, steadily increasing gasoline prices, continuing housing related issues and declining levels of consumer confidence resulted in decreased guest traffic for us and many of our peers in the restaurant sector.

The researchers controlled variables and looked at companies which blame internal factors (strategic decisions, the release of new products) for poor earnings versus companies that blame external factors (the economy).

The results:

They discovered that when these companies explained failures in their annual reports, those that pointed to internal and controllable factors had higher stock pries one year later than those that pointed to external and uncontrollable factors.

This got me thinking to a quote I saw from Sardar Biglari at the Western Sizzlin meeting:

Steak N Shake is not declining because of the economy … almost everything that could go wrong with Steak n Shake has gone wrong.

We should be in for good things now that we have a CEO who is willing to blame our current woes on internal deficiencies, instead of writing them off as problems outside of management’s control.

Today Steak N Shake (NYSE SNS) annouced that Sardar Biglari will serve as Chief Executive Officer:

Mr. Biglari commented, “I would like to thank Wayne for his guidance over the last several months. In reviewing Steak n Shake and beginning to implement its restructuring, the Board and I concluded that to achieve the best results, we need an executive who will be focused on restaurant operations. As a consequence, we will seek a president with significant restaurant experience to concentrate on improving restaurant operations, whereas I will assume the CEO position, leading the organization principally from a strategic, financial, and governance perspective. Concurrently, we are presently undergoing a comprehensive examination of the company and are in the process of implementing a restructuring program — closing underperforming locations, reducing G&A, shortening hours of operation in many locations, and other initiatives — all on the premise that Steak n Shake will be managed based on cash flows in order to create long-term value for shareholders. Steak n Shake is an iconic brand with greatly talented people working throughout the organization. Because of all these advantages, I am confident we will regain the chain’s prior status as a great company. Details of our plan will be disclosed within the next 60 days in a shareholder letter.”

The Steak n Shake Company Announces Change in Leadership (Yahoo)

My reaction to this change is positive but mixed. Biglari became chairman with the intention of helping influence the board into finding someone to run operations for Steak N Shake (SNS). The fact that this has not happened is a little disappointing, but I know that Biglari is working 17 hour days and he has already had a positive effect at the company (steering SNS to tax savings). I’d rather that we patiently wait for the right president to be found. We’re going to need someone good in order to excel in this kind of economic climate.

One thing I’m wondering is whether we’ll see a merger between Steak N Shake (SNS) and Western Sizzlin (WEST). It would be a little similar to what Eddie Lampert did with Kmart and Sears. The same could happen with Steak N Shake with Western Sizzlin since both are in the restaurant industry, we could see some cost savings and synergies achieved by merging. Although getting the financials to work out, especially currently, would be a major stretch.

In my previous post I put up a transcript of an interview with Joel Greenblatt on his magic formula book. Here’s another interview (May 15, 1997) I found on CNBC about his older book You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits. This is by far my favorite investing book and is worth taking a look at for its material on special situations/ balance sheet event driven investments.

DAVID: Your book says you can be a stock market genius, even if you’re not too smart. What are some of the tricks here that–that–that allow you these kind of astronomical returns?

Mr. GREENBLATT: Well, I think to do it the way everyone else does it every year, 80 percent of the mutual fund managers who do a lot of work, can’t seem to beat the market, you have to take maybe a little different angle. And the way I look at things is if you’re looking in places that other people aren’t, you have a much better chance of beating the market.

DAVID: And these are what you call pockets of opportunity’?

Mr. GREENBLATT: Right. There are some areas of the market where, on average, those areas beat the market just randomly selecting those areas.

DAVID: Let’s talk about spin-off securities, which is one of these pockets. T–tell us about spin-offs–I–the one I talked to you about before we went on the air, that I thought of, was Lucent Technologies–is that an example, wh–when it was spun off by AT&T?

Mr. GREENBLATT: Sure. AT&T actually had two spin-offs last year: One was Lucent Technologies and one was NCR. The one that I purchased was NCR. What happens is, is that–NCR’s a computer company, was a division of AT&T, a telephone company. And to separate itself–this small division from the company–they would distribute shares–AT&T distributed shares to its shareholders in NCR. They weren’t purchased. Just if you owned AT&T shares, you would get a distribution of NCR shares. What happens to these shares is that people who get them sell them off.

DAVID: Mm-hmm.

Mr. GREENBLATT: They bought AT&T–they bought a telephone company. They’re not interested in a computer company that AT&T lost $ 7 billion in in the last six years.

DAVID: Well, they sell them off, though, doesn’t the price go down?

Mr. GREENBLATT: The price–that’s exactly why there’s an opportunity. The people who get the stock don’t want it…

DAVID: Mm-hmm.

Mr. GREENBLATT: …they sell it. You get an initial low price, and w–on average–there was a 30-year study that showed that spin-offs beat the market by 10 percent a year just on average.

DAVID: Got a minute, so we’ll have to split it up. But the other pockets of opportunity–merger securities is another one. Give me an example.

Mr. GREENBLATT: Well, when Viacom purchased Paramount, they purchased it with cash, they purchased it with stock and they purchased it with four other securities–warrants, convertible debentures, things of that nature. If you own stock in Paramount and–and Viacom bought it, you would get stock, you’d get cash and maybe you’d keep those things. But if you get all these securities that you’ve never even heard of, you just sell them off. And there’s an–another opportunity to have extraordinary gains in that area.

DAVID: How do I turn somebody else’s misfortune into my fortune with bankruptcies?

Mr. GREENBLATT: Well, what’s interesting is, in bankruptcies, you don’t really invest in stocks after they go bankrupt, but what you can do is–the way stocks come out of bankruptcy is that they give their creditors, like a bank or a–a–a supplier, stock in the company…

DAVID: Mm-hmm.

Mr. GREENBLATT: …so that they can come out–because they can’t pay off the debt…

DAVID: Right.

Mr. GREENBLATT: …because they don’t have the cash. So these suppliers and banks get stock in a company that they had no interest in getting.

DAVID: Right.

Mr. GREENBLATT: They sell it right off. It’s the same exact opportunity as in spin-offs and merger securities.

DAVID: It’s all in here, “You Can Be a Stock Market Genius, Even If You’re Not So Smart.” Our thanks to Joel Greenblatt, author of “You Can Be a Stock Market Genius.”

While doing some digging I found another interview with Greenblatt about special situations. This interview aired April 24, 1997 on CNNfn:

THIERRY: Some would say you wrote the book on-well, “You Can be a Stock Market Genius Even if You’re Not Too Smart.” It happens to be the title of your book. Is that really true that you can be a stock market genius even if you’re not to smart? Why is that?

GREENBLATT: Well, I mean, if you look at the professionals, 80 percent of them don’t beat the market every year. So, that’s really not the place that you should look, going into work every day, picking stocks. It doesn’t seem to work. So, I think the trick that I put in my book is looking in the right places. There are certain areas of the stock market where, just if you randomly select within those areas, you can beat the market. One of the easiest things for most people to check out for themselves is the area called spin-offs. And studies have shown that spin-offs-companies that were once subsidiaries or divisions of a larger company that get spun off to the shareholders of the larger company-do quite well. In fact, they do twice as well as the market on average.

THIERRY: But you want to know about them while they’re takeover targets.

GREENBLATT: No, these aren’t takeover targets.

THIERRY: Really?

GREENBLATT: What happens is these are small divisions of a company.

THIERRY: Of a company.

GREENBLATT: So, let’s say an insurance company owns a steel company. They could possibly say, listen, people don’t want to own both an insurance company and a steel company in one stock, so what they’ll do is spin off the steel company to their own shareholders. So now, everyone will own shares in a steel company and own shares in an insurance company. And what turns-seems to happen is that the shares that are just distributed-in other words, they’re not sold by brokers or anything else, you just get these shares- seem to perform very well, mainly because they’re priced very low in the beginning. No one wanted these shares. They’re sold off. They trade at low prices, and over the subsequent three years, they beat the market by 10 percent a year. So, in other words, if the market over a long term averages 10 percent a year, these will do 20 percent a year.

METAXAS: So, what opportunities are there right now in the market, and do you think it’s a good time to be looking at some of these situations?

GREENBLATT: Well, you know, I don’t predict the market, really, or where it might go. And I really pick stocks in special situations. And what’s interesting about spin-offs in particular as one area would be they’re always happening. And the reason why they’re cheap has nothing to do with where the market is as the current time. What it has to do with is the fact that people are getting shares that they don’t want, and they sell them.

So, there’s a few coming up right now. In the next few months, Westinghouse (Company: Westinghouse Electric Corporation ; Ticker: WX ; URL: http://www.westinghouse.com) is spinning off their industrial businesses. They’re going to keep TBS and they’re going to change their name to CBS, and there’s going to be a company called Westinghouse Electric which has their industrial business which includes Thermo-King which makes refrigerated trucks. It includes power plant manufacturing and energy manufacturing.

THIERRY: So, you would like the Westinghouse portion of it more than you would like the CBS portion?

GREENBLATT: You know, the funny thing is they both work out. The parent companies do quite well. They beat the market by about 7 percent a year, whereas the spin-offs themselves beat the market by about 10 percent a year.

THIERRY: All right, then take something a little bit more complicated: Pepsi (Company: PepsiCo Incorporated ; Ticker: PEP ; URL: http://www.pepsico.com/). All right, they’re going to spin off, I guess, in three ways or something.

GREENBLATT: Well, actually, Pepsi right now is going to spin off in two ways, except one of their divisions-Pepsi’s going to separate their restaurant business which is Kentucky Fried Chicken, which is Pizza Hut, which is Taco Bell-into a separate company. And Pepsi is going to keep Pepsi and Frito-Lay as one company, and the other company will be those three fast food restaurants. And together they’ll have about 29,000 restaurants. But it will be distributed to Pepsi shareholders who generally were buying because Pepsi’s a good business, just like Coke (Company: The Coca-Cola Company ; Ticker: KO ; URL: http://www.cocacola.com/). It’s-they sell concentrate, and it’s a nice growth business, where the restaurant business has stagnated to some degree. It’s kind of mature business that’s not growing. And that will be appropriate for certain people, and the faster growing soda business will be better for others.

METAXAS: What other themes do you like?

GREENBLATT: Well, another theme that I discuss in the book is buying companies that are coming out of bankruptcy-not going into bankruptcy, and not stocks of companies that just filed for bankruptcy. But what happens in a bankruptcy is that creditors of a bankrupt company-usually a bankrupt company doesn’t have a lot of money. So, they can’t pay off in cash their debts. So, what they give out is stock in the company and the new shares in the new company, the newly recapitalized company, after it comes out of bankruptcy. And a lot of times those share-a bank who gets shares in stock don’t want it. They sell that off, too. So, there’s another opportunity there.

METAXAS: What about insider buying? That’s another one of your themes.

GREENBLATT: Well, in anything that I do, I care that management’s on my side. So, while I said that, for instance, in the spin-off area, that you can double the market just by randomly selecting, I say you can do even better than that.

Let’s-let’s find things that are actually-will do better than the average spin-off which is already doing twice as well. And how do you find those? There are certain things you look at. One of them is insiders want it. That’s the easiest way. If the-I look at how much the insiders are getting paid in common stock and options, and how much they’re getting paid in salary to see how much they’re on my team.

If they’re getting big salaries and they don’t own much stock, I figure their interests aren’t aligned with mine. So, I try to stick to situations where management has a very big incentive to get the stock up. And, even just selecting that one area which is the most important to me, and selecting spin-offs, then you could do incredibly well.

CALLER: Oh good morning everyone. I’m thinking of selling my AT&T (Company: AT&T; Ticker: T; URL http://www.att.com/)and buying Westinghouse?

METAXAS: What do you think?

GREENBLATT: Well, that’s pretty interesting. Westinghouse (Company: Westinghouse Electric Corporation ; Ticker: WX ; URL: http://www.westinghouse.com) is actually going to be spinning off some of their divisions and separating CBS the faster growing and more attractive business from some of their slower growing and industrial businesses. Their core business from the pass. So, it’s a very interesting situation.

I think if you have a long term view of the market, which I think you have to have at this point, stocks are - especially the larger capitalization stocks are pretty high priced at this point, I think some of these will work out and you pick two somewhat depressed stocks; the AT&T and Westinghouse.

METAXAS: AT&T has already gone through that process of spinning off its division.

GREENBLATT: They have. They just spun off NCR which was also an interesting spin off possibility and that’s a stock that I own right now too. AT&T has a difficult challenge. Their business is changing. I don’t know any who really has a handle on how things are going to workout there. I think they should. AT&T should have the biggest advantage. It’s really fixed -costs business where you have everything in place, and if you are the biggest you should have the best costs advantage. So if they get their management act together, AT&T could turnout very well.

METAXAS: But you’d make that trade?

GREENBLATT: Westinghouse - I like playing special situations, when something interesting is happening. I read one report on Westinghouse which suggested that if they could get the ratings up at CBS you could see a $30 stock price near the next two or three years. And I think the industrial businesses could be interesting. It depends really how much debt is put on them, and how the distribution is made. But their both interesting situations. I probably wouldn’t favor one over the other in that stance, and it depends on what your tax situation is. If you can take a short-term tax lost by selling AT&T and swap for a Westinghouse. That might make sense. If you’re going to take a big gain, you know their both fairly attractive.

THIERRY: We’ve got Westinghouse down an 1/8 at 18 and AT&T down at 31. Our next caller is Mike in New Jersey.

CALLER: Hi, how are you doing. Could you tell me your long term on Compaq (Company: Compaq; Ticker: CPQ; URL: http://www.compaq.com/).

GREENBLATT: Well, the way I pick stocks is a know a lot about a few things. And I have a position in a small company that I don’t want to name that sells a lot of Compaq computers, and services . They’ve had a slowdown lately because the changeover in the new chips, and people - company sort of waiting for either the prices of the old stuff to fall, this is the usual game in the computer business or the their new stuff to come out, and sort of in paralysis and then a short term so what they’re going to pick. So, I really don’t have a long term call on Compaq. It’s a technology stock, also out of my

METAXAS: So, you’d just avoid. You think there is plenty else out there for you to be investing in.

GREENBLATT: Well, I think there doesn’t have to be plenty to be investing. I think this is certainly a stock that was market is what they say, in other words I probably wouldn’t buy the S&P 500 here, I think it has had a very nice run. The larger stocks have done very well, and I don’t know how that continues for a long time, and if you look at Warren Buffet’s latest letter, he said most stocks are overvalued at this point, including the ones he own. And what I think he’s talking about because he runs billions of dollars, he talking about the larger stocks. There are bargains in some of the smaller stocks that have gotten beaten up. This has been a large cap rally, and there is still a lot of small stocks that have gotten beaten up already. So that you don’t have to worry about a market fall quite a much. They all fall in a bear market, but if you pick thinks that have been beaten up already, they should rebound maybe sooner.

THIERRY: Well speaking of that, really the rally has been in such narrow for the blue chips you must be concerned about the fact that it has not broaden out,.

GREENBLATT: Number 1 I have no respect for anyone who has an opinion on where the stock markets going.

Having said that, it does scare me a little the big stocks - it’s been a very narrow band of big stocks that have done particularly well and left a small stocks in the dust. The other side of that coin, there may be opportunities in some of the smaller stocks that already been beaten up, and maybe that’s where I’d look if I were going to invest in the market, because I don’t feel like taunting it and I’m just trying to pick my spots a few things that I know well, that I want to buy is the way to play.

CALLER: Yes, I’d like to know how do you find out the information on the executives that have big holdings in companies which you’ve mentioned?

GREENBLATT: That’s a very good question, and it’s-there’s an interesting answer to that. It used to be much harder. You’d have to either write to a company or go down to the SEC and actually get filings or pay a service for–$20, $30-for each filing. Now, you can really get all this stuff for free over the Internet for the price of a phone call.

SEC requires all companies to file under the EDGAR system, and these are all posted on the Internet in a number of different sources, many of which are free. And you can just look it up, usually in the proxy statement it tells you exactly. When you’re talking about a spin-off, they have to file special filing called a form 10 approximately two months before they actually spin off the company.

So, it’s not even trading yet, and you’ll have two months to study up on a company. You don’t really have to have a quote machine or something like that tracking these things. You’ll have a couple of months to do your research. And, since there were about 100 spin-offs last year, and you probably only need five or six different securities in your stock portfolio, there’s plenty to choose from just in that area. So, those are available in the form 10, also available over the Internet for free.

METAXAS: Do you think five or six stocks will do it?

GREENBLATT: Yes. I think that one of the problems and one of the reasons why mutual funds don’t really out-perform the market is they can’t just stick to their five or six or seven best ideas. Generally, they’re running hundreds of millions or billions of dollars and they have to for legal
liquidity and compliance reasons invest in 30, 40, 50, 60, 100, 200 stocks. It’s tough to have 200 good ideas at one time, but it’s not so hard to have five or six good ideas. And that’s why, if you include all the expenses and having to pay their management fees, that’s why most of them under-perform most of the time. And even the ones who do better than average for a year or two, usually there’s no correlation between how they’ll do the next year. So, that’s not even going to help you. So, I think the bottom line is to do it yourself. But you have to put in a little bit of time. But it’s not that hard.

THIERRY: So, you really shouldn’t be running with the herds. In fact, it was said this morning that a lot of mutual fund managers are worried about the Jeffrey Vinik syndrome, and therefore, they want to just invest in the same stocks that every other mutual fund manager is going to invest, so that nobody could get fired, really, for being wrong. I mean, if they’re wrong, they’re wrong with everybody else.

GREENBLATT: I think that’s true, and I think the name of the game really in the mutual fund business is not to make money; it’s to do a little better than the market, or at least not worse than the other mutual fund managers. So, when I invest for myself, I’m trying to make money. When a mutual fund manager who is down 10 percent when the market’s down 20 percent is dancing.

THIERRY: He’s trying to keep his job.

METAXAS: Let’s go to David in New York. Hello, David. You’re on the air, David. All right, David was going to ask about Informix (Company: Informix Corporation ; Ticker: IFMX ; URL: http://www.informix.com/).

GREENBLATT: Well, it’s lucky, because I don’t know anything about it.

THIERRY: All right, well, there you go.

METAXAS: All right.

THIERRY: Let me just ask you then, if you are narrowing it down to the five or six, one of the five or six that you like is American Express (Company: American Express ; Ticker: AXP ; URL: http://www.americanexpress.com/), right?

GREENBLATT: Yes, actually I’m at the tail end of that position. That was a spin-off. They spun off Lehman Brothers(Company: Lehman Brothers Holdings Incorporated ; Ticker: LEH ; URL: http://www.lehman.com/) several years back, and the reason why-and in that case American Express was the parent company. I didn’t-I looked at Lehman Brothers, and the insiders didn’t own much stock. So, that’s one of the things I look at. I usually look at three things, but that’s one of the main things I look at. They didn’t own much stock, so I didn’t want to deal with that. But then I started taking a look at American Express which was the parent company of Lehman Brothers.

One of the reasons that most investors didn’t like the stock is because Lehman’s earnings were so volatile it screwed up the growth picture that was really happening in American Express which has two very good businesses; as a charge card business and an investment management business. So, once that was freed it-and if you subtracted the value of what you got for your Lehman stock and just sold it off, then you were able to create American Express at nine times earnings. And this is a real franchise. This is a Warren Buffet franchise. It turned out about nine months after the spin-off took place, Warren Buffet did take a 10 percent position in American Express, and this was really uncovered through the spin-off process, and so American Express at that time was around $30. And it’s had a great run here, when-where people though that, gee, these are great businesses and they’ve had a huge earnings explosion, should earn over $4 this year. And it’s a very high-quality stock. It has had a nice run.

The only reason I’d hang in there now is because they were in talks with Citicorp (Company: Citicorp ; Ticker: CCI ; URL: http://www.citicorp.com/) at the end of last year. And I think once you’ve decided to sell your company, I think that’s the end of the game. It’s very hard to keep your employees motivated and everything else, and I think they’re in a little bit of Limbo now. And I think when they find the right deal-and Citicorp would have been a very good deal. It probably wouldn’t have been, from what I’ve read, a big premium to the stock price. But, what would happen if Citicorp and American Express merged together, there would be a lot of cost-cutting they’d be able to do, because Citicorp has a huge credit card portfolio, and there would be a lot of overlap and Citicorp would love to have American Express’s investment management business. And, I think both stocks would go up significantly, even if it was a merger of equals.

METAXAS: All right. We have a quick question on banking now from Diana. Good morning, you’re on the air.

CALLER: Yes, good morning, I’m interested in Chase Manhattan Bank (Company: Chase Manhattan ; Ticker: CMB ; URL: http://www.chase.com/), what you think of it. It’s gotten beaten up kind of the last week or so.

GREENBLATT: Well, actually I used to own Chase Manhattan. I actually sold it before it made its big run-up, right around $90. I guess it ran up way past there. I’m not sure where it is today, but in that area. You know, I was a seller of that, basically because you’re sort of-banks have had a very nice run. I try to look at normalized earnings, in order words, how much Chase should earn in a good environment or in an average environment, actually. And I think now we’re a little better than average.

They have a big credit card portfolio, consumers, and every few years the banks blow up in some area. At one point it was foreign loans. Now, I think the next coming crisis and that’s the issue, whether it will come or won’t it come is they have a big exposure in credit card lending. And consumers are really strapped. And I think with the economy still strong, you’re still having huge amounts of bad debt expense for all these credit card companies, and I think that-I think that we’ve hit the peak in that area, and although I don’t think it’s an expensive stock, there are probably cheaper things out there.

So, I think it ran even further than if it was going to normalize. So, I think it’s a good stock, not a great stock.

THIERRY: And, as opposed to spin-offs, we’re seeing so much consolidation in the banking industry right now.

GREENBLATT: Yes, which is a big move. And, obviously, that was- Chase has more than doubled over the last couple of years, and that was really the merger with Chemical. It was a huge cost- cutting benefit, eliminating a lot of duplicate. And that’s- operations-and that’s been the big story in that stock. And that story’s out. They’ve achieved the benefits, or at least it been
assumed that they will achieve the benefits that they planned in the stock price now, and I don’t think it’s overpriced. I just don’t-and relative to the market, it’s probably a good buy. It’s just I think it’s had its run.

THIERRY: All right, let’s go to Alice in New York.

CALLER: Hi, Joel, I just wanted to say I thought your book was terrific. Could you tell me what your favorite spin-off idea is today?

GREENBLATT: Well, there’s one that we own-I really don’t like to tout stocks in general. I mean, the idea behind my book was to really teach people to fish for themselves and they could eat for a lifetime. And one of the-but, one of the things that we do own that
was-is a big cap stock that I don’t think will move the stock one way or the other was a spin-off from, actually, AT&T (Company: AT&T; Ticker: T; URL http://www.att.com/), and that company is NCR (Company: NCR Corporation ; Ticker: NCR ; URL: http://www.ncr.com/).

Back about six or seven years ago, NCR was purchased by AT&T in a hostile deal, and they paid about $7 billion. Since that time, they’ve sunk in about $3 billion into NCR, so that’s about $10 billion. They spun it off in January. Now, the stock with no debt is priced at $3 billion. And, if you really want to look at it, the stock’s at $30. It’s got $11 a share in cash with no debt. So, really, we’re down to a valuation for the actual business of NCR of $1.9 billion. And NCR has a couple of good businesses. I’m not an expert in technology, but this is the way I look at things. If I feel like if I’m not going to lose money, then the other alternatives are pretty good. So, I’m looking down. I have $11 in cash in NCR; the stock’s at $30.

They have a data warehousing business which should do about $800 million in sales this year, and that’s the business where they provide computers for, let’s say, Wal-Mart (Company: Wal-Mart ; Ticker: WMT ; URL: http://www.wal-mart.com/) and they, at the check-out counter, there’s a huge amount of information that flows through there, there are only very few computers that can do it, and NCR is the leader in that field, data warehousing, even though it’s small relative to their $7 billion in sales, it’s a fast growing business. And, other competitors might trade at two or three times sales. Just give that one times sales. That with the cash covers most of the value of the stock. And there’s still over $6 billion of sales left.

THIERRY: All right, there you go.

METAXAS: All right.

THIERRY: Joel Greenblatt, Managing Partner at Gotham Capital. Thank you so much for joining us this morning.

GREENBLATT: Well, thank you for having me.