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February, 2002


There is a style of investing known as bottom fishing, in which the intention, just as the name implies, is to find good value among assets that are neglected and forgotten by almost everyone else, that have already sunk to the bottom where, among the discarded junk, few would expect anything of real worth. It goes by other names as well, such as contrarian investing or bargain hunting.

Warren Buffett has referred to it as "cigar butt" investing, the object being to find among the things others have thrown away sufficient value to give you "one or two more good puffs," while the asset(s) in question can be obtained with almost no risk because the "free puffs" are no longer generally recognized as even worth picking up, and they are priced as if all the good is already smoked out of them.

They have also been called "dead cat bounce" stocks, on the theory that they've already died so many times that, even if a cat, they cannot come back to life, but, nonetheless, may have some bounce left in them once they hit bottom.

In today's somewhat inflated equity markets, with many stocks still above their traditional levels for good value, despite the concerns over a recession, the 9/11/01 terrorism, and the implications of the Enron collapse, it is hard to employ a bottom fishing strategy in the classic method, as advised by Benjamin Graham (considered the father of both security analysis and value investing). Mr. Graham preached the efficacy of holding a large portfolio of stocks, all selling well below their net asset or book value. More than a mere handful of such stocks would be hard to find today.

Nonetheless, it may be possible to acquire a few assets that have some of the characteristics of "edible" bottom fish or still "puffable" cigar butts. These are not generally equities to hold for the long-term but ones to buy while most analysts and investors are still avoiding them and then sell again soon after they've had their "dead cat bounce" and are once again popular.

So, if you already have most of your equity dollars invested in well run, solid core holdings, repositories of excellent value, assets, for instance, like Berkshire Hathaway (BRK.A; BRK.B), Weitz Partners Value Fund (WPVLX), Tri-Continental Corp. (TY), Liberty Media, Class A (L), or Washington Mutual (WM), it may be worthwhile to take a look at assets that are not as yet generally attractive but which can eventually be the "comeback kids" of your portfolio.

One such business and stock for your consideration is General Motors (GM).

It just announced significant new layoffs and curtailment of production at two of its plants. Schwab and Value Line consider it untimely, with poor technical rank and low price appreciation prospects over the next several years. Its price-to-earnings ratio (P/E) is a hefty 28. During the last fiscal year (ended 12/31/01) GM's net income fell 87%. In short, it's considered by most to be a dog.

Yet, on the 2/15/02 PBS program, "Nightly Business Report," market analyst Elaine Garzarelli, who correctly turned bearish shortly before the October, 1987, crash in the stock markets (but whose overall record for timing has not been stellar) has just recommended GM, based on her proprietary "indicators" (which I find less than impressive).

What then is in GM's favor? First, at its recent price of $50.32, General Motors has a yield of about 4%, more than double that of the U.S. stock market as a whole. As the world's largest automaker, GM is a relatively safe stock, with excellent company brand recognition and customer loyalty. It is unlikely to face bankruptcy in the foreseeable future. Price-to-book value is less than one (.97) and the trailing price-to-sales is only 0.15.

Although volume is down recently, GM's management intelligently kept vehicles rolling through the recent recession with abundant 0% financing, in the process perhaps helping to keep not just company sales, but our entire economy afloat.

In contrast to Schwab and Value Line, Standard and Poors gives GM mildly bullish technical and relative strength ratings. Besides auto and truck sales, much of GM's earnings derive from financial services and insurance, which remain profitable.

It is also transacting with Korea's Daewoo Motors to incorporate that company in its operations, giving it a better inventory of low cost, popular autos and an improved entry into the Korean vehicular market.

Typical of bottom fishing buy candidates, GM looks to still have an uncertain, rough time ahead, but appears on its way toward an eventual return to substantially increased earnings. The shareholder will likely need patience, though, as it is not at all certain that, with their drop in the 9/11 market climate, this company's shares have completely tested their lows. Indeed, the buyer of this stock should take into account the likelihood of nail-biting losses in share price before its intrinsic value buoys it to impressive total returns.

Following an agreement, in 10/01, to divest GM Hughes, with a sale to the EchoStar satellite company, a deal structured so that GM will now own 11% of the combined GM Hughes/EchoStar corporation, GM is a competitor in the potentially highly profitable digital, entertainment, information, communication services, and satellite networks industries. Its zero percent financing in 2001 did perhaps undercut its profits going forward but it also dramatically reduced its vehicular inventories, laying the foundation for more sales of its excellently engineered, cost-competitive autos and trucks (in which it has increasing worldwide exposure) over the next few years. Its several billion dollar cash infusion from the GMH divestiture will also improve its financial position.

All told, the EchoStar deal shares and cash, improved competitiveness of GM vehicles down-the-road (so to speak), and anticipated wider recognition of this giant company's strengths, are felt to offer the investor at today's stock prices a substantial discount.

Is GM a risk-free investment? Hardly. But its combined per share intrinsic value would seem, as Argus suggests, to be at least $60. This is considered to be a conservative calculation. The company's intrinsic value may be recognized as significantly much higher as its new satellite company involvement and promise are realized.

Argus Company (1/17/02) gives it a "Buy" recommendation. We agree.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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