I met Joel Greenblatt in 1980 at the Harvard Club in New York — allegedly. I have absolutely no recollection of this but take his word for it. At the time (he claims), he told me he was thinking of writing a book, and I volunteered to take a look.
Comes Mr. Greenblatt 16 years later — or, at least, come the galley proofs of his book, You Can Be a Stock Market Genius (Even If You’re Not Too Smart): Uncover the Secret Hiding Places of Stock Market Profits — with a very charming letter asking whether the offer is still good. Might I write a blurb?
And a blurb he got, too, because for those of us foolish enough to shun low-expense mutual funds — who try instead to beat the averages (and the pros) going solo — this book, due out from Simon & Schuster in March, provides a bit of help.
Mr. Greenblatt has not written it, so far as I know, to attract new clients. He has no clients anymore, he says, having shut down that part of his business and investing only for his own account. Nor has he a pricy newsletter he’s trying to sell you.
Doesn’t need to. If Mr. Greenblatt is to be believed (and I have no reason to doubt him), he has earned in the vicinity of 50% a year on his money for the last decade.
An awesome performance. (It would turn every dollar into $57, pre-tax, or into $14 if federal, state and city tax cut the 50% annual gain to 30% after tax.)
The reason I’m inclined to believe it is that his book makes a lot of sense.
So I sent him a blurb and, by way of thanks, he sent me a stock tip.
I don’t accept gifts from people or institutions I write about, and I certainly don’t accept payment for blurbs. But how do you return a stock tip?
The easiest way, I suppose, is simply not to act on it. But that would have required a level of self-discipline to which I have not yet been able to rise. So — fair warning — I bought some of this stock at 33-3/8 (and plan to buy more if it goes lower this week).
Needless to say, it could certainly work out badly — so many of my little forays and sorties do! — which is one reason I don’t usually write about specific stocks.
Then again, some of you come here every day, often suffering through the most inane musings without complaint, so, for what it’s worth, I wanted to share Joel’s tip with you.
It comes from an area of the market that Joel has become a specialist in: the “spin-off.” You can read lots about this when his book comes out in March, but here’s the essence of it: When a company spins off one of its parts — as AT&T spun off NCR last week — the spin-off frequently represents a good opportunity.
For starters, a lot of people (and institutions) sell the spun-off shares just because they’re a nuisance or because they don’t want to do the work of analyzing them. There you were with 200 shares of AT&T, and now you’ve got these silly 12 shares of NCR in your account (the spin-off gave holders one NCR share for each 16 AT&T), so, to tidy things up, you sell them.
Index funds, meanwhile, must sell, because the spin-off is not part of the index they’re supposed to reflect.
There’s nothing rational about that selling, so it may create an opportunity for you and me. It certainly seems to have done so for Joel.
Another reason to favor spin-offs: at first, few analysts follow them.
And another: generally the management of the spin-off is given a strong incentive, by way of options, to make them work. As part of a larger company, their efforts are less directly rewarded.
And another: sometimes an effort is made to bring the spin-off out at a low price or to “talk it down” at first, so the manager’s option price can be as low as possible.
And there are a few other reasons — although considerable analysis is required to separate the best spin-offs from the average ones from the clunkers. A little luck doubtless helps, too.
All that said, let me give you the benefit of Joel’s analysis, with the caveat, once more, that there are no sure things in the stock market, and very smart, very successful people are frequently wrong. Here’s what Joel wrote me last week:
NCR closed in when-issued trading at 33-3/8 New Year’s Eve. [This is approximately what Joel himself paid for his shares — he waited until it had dropped from around 40.] It begins regular trading today [January 2]. Many index funds that have not already sold should be selling in the next day or two. Management’s substantial option package has been set based on the last 5 days of when-issued trading, just completed. The new management has gotten NCR back to break even in the first nine months and fourth quarter earnings should be a pleasant surprise. NCR will have approximately $7.5 billion in sales in `97 with 100 million shares outstanding. Approximately $1 billion sales in the ATM business and maybe $800 million in data warehousing — both businesses worth at least 1 times sales. With $8 per share in net cash, this totals approximately $26 in value. That leaves a $7 price for the remaining $5.7 billion in sales. This is 12 cents on the dollar of sales. Even rotten companies trade at over 40 cents on the dollar.
The bad news [Joel continues] — I know almost nothing about computer companies. In any case, if it works out, buy me lunch. If not . . . I’ll give you your blurb back?
Joel hopes NCR might hit $50 some time in the next 12-18 months. To order his book for delivery when it’s published, click here and search on Joel Greenblatt.
Note that computer analyst John B. Jones, of Salomon Brothers, described by the New York Times December 31 as “one of the few on Wall Street to look closely at NCR,” thinks the stock is wildly overpriced — even $25 would be too rich, he says. Either he’s right, or else management has done a good job of lowering expectations.
Tomorrow: Another Good Investment Book: One Can Only Marvel
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To some, the glass is half full. To others, half empty. To an engineer, it's twice the size it needs to be.~unattributed
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