How business, doctors and journalists prey on your food anxieties I

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STREETWALKER
A Salomon bull
Is ANYONE still bullish on Salomon
Inc . (ss), which has deliN°ered incestors
disappoinmtenr <strong>and</strong> continues
to hemorrhage talene Streenvalker
actuallv found a Salomon bull . He's
Michael Flanagan, an analyst at Lipper
Analytical Senices .
Flanagan argues that the numbers
indicate Salomon's <strong>business</strong> is
becoming less ~olatile . It earned
$81 million in the first quarter, a bit
more than it lost in the second quarter.
That was a swing of about S140
million quarter to quarter, as compared
with a swing ofa quarer-billion
dollars in the same two quarters last
year . Flanagan is persuaded that the
lower % nlatilirv means Salomon's
traders are taking fewer risks .
At the same time, Salomon's
nontrading <strong>business</strong>es are doing better,
with investment banking reNenue
up sevenfold over the first quarter
. Salomon will split some 535
million «~ith Dillon, Read & Co . for
advising on the merger of Scott Paper
with Kimberl%,-Clark .
Flanagan points out that at a recent
price of 35~/3, Salonton's shares
are trading at just a shade oN er book
value . Contrast that to Merrill
Lynch's price of 1 .8 times hook . Of
course, Merrill has been consistently
profitable while Salomon has been
consistently erratic, but Flanagan's
point is that if Salomon can make
money on a regular basis, there's ple n
rv of room on the upside .
The 1Vlicrosoft factor
LIGHTHOCSS CAPITAL, a $135 million
(assets) Houston investment
firm, has been short a lot of technolog}'shares
. One of its favorites is 5d8
million (estimated 1995 sales)
UUNet Technologies, which provides
computer users with access to
the Internet . Microsoft has hired
tiUNet (eU NT) for its nesv Windo«°s
95 . Microsoft oNrns 15% of
UUNet .
UUNet came public at 514 a
share in May <strong>and</strong> climbed to 49 last
month, giving UUNet a market
capitalization of 51 .4 billion, although
the company has Net to turn
a profit . Even after failing to a recent
182
Hyping the net
Uunet Techn°logies' stock price ( endine ]2595 )
50
Nobody's
~ making money
1- ; 4 on the Internet?
- ' UUNet's share
40 ~ ' price has tripled
- f since May .
30
20
44r/, it is ovenalued, says Richard
Hunter, an analvst at Lighthouse .
Rakesh Sood, an analyst at Hambrecht
& Quist, disagrees . He's recommending
the stock . But even
Sood concedes that li UNet %s-ill earn
only 25 cents a share in 1996 . That
would mean that the stock trades at
178 times next }•ear's earnings,
Killjoy
RL:esaT THE sS.tNTRA : Stocks return
on average 10% a cear . That mantra
has lured lots of no N ice imestors
into the stock market . Maybe the
mantra is true, but only for the
probably fictional long-term imestor .
For }'ears on end stocks can do
much worse than that . From 1966 to
1982, on balance, the} \tent no-
~chere in pr ce <strong>and</strong> returned only a
modest amount in di~tdends . Then
thcy put on a spurt .
John Bogle, founder <strong>and</strong> chairman
of the Vanguard Group of mutual
funds, reminds us of this frightening
<strong>and</strong> patience-testing irregularity .
In an article to be uublished this
month in the Journal of Porffnlin
,4fasea,gerrzent, Bogle offers a method
for predicting stock <strong>and</strong> bond returns
. If he's right, people aho etoect
10°b, returns on equities over the
next decade or so are in for a shock .
Bugle predicts stock returns will
slip to 8% oser the next decade-on
average, meaning in many years returns
will be lo\% er or even negatiee .
Bogle reached his estimate bv
taking the current dividend yield of
2 .5%, <strong>and</strong> adding to that one of m 'o
sets of figures . For one set of figures
L•e looks at data on di% idend growth
~
rates, <strong>and</strong> what the impact on returns
will be if the price-to-dkidend ratio
recerts to its historical a% crage .
His alternative method estimates
probable earnings gro vth over the
next decade, <strong>and</strong> figures in the impact
of changes itt'/F mtdtiples back
to their historical median .
Surprisinglv, the two methods
result in virtuallv the same total retLLr
n forecast : an aCCrage 3°.o per
annum . Since about 2 .5 points of
that is dividend yield, he is looking
for anerat7e appreciation of iust 5 .5%
a }'ear-taking into account the
growth of reinvested dividends <strong>and</strong>
capital return . Not exactly ~x hat the
ne%cer generation of investors has
come to eapect .
Ho~c seriouslp should one take
Bogle's numbers Very . Using s milar
metltods, he predicted that stocl s
«ould show average returns of 8 .7%
per year in 1990 9-4, <strong>and</strong> his estn
matc N.as right on the nose .
By Bogle's reckoning, bonds will
be more competiti~e with stocks than
they have been in recent years . He
predicts that bonds will vieid a shade
under 7% annuaih' over the decade .
<strong>How</strong> does he flgure that? Simple .
He just takes the current yield on 30-
aear Treaswys, pointing out that
changes in the market price of bonds
even out over long periods, lea% ing
income as the driving factor.
Of course, tltat still leaaes stocks
with a tax advantage os-er bonds so far
as individual incestors are cottcerned
. «ith bonds, the [as is your
partner on ere :y interest payment .
With stocks, most ofthe return is
from capital gains, v~hidh are taxed
at a lo%~°er-<strong>and</strong> deferred-rate .
c ,rbes . A t, Su st 1 4 ,199,
2046673438 F
http://legacy.library.ucsf.edu/tid/agf97d00/pdf