Marshall Loeb, the former managing editor of Money and Fortune, conducts a regular series of conversations with today’s leading chief executives on the Stern campus.

 

 

		James Cramer is the co-founder, contributing editor, and director of the TheStreet.com, an online financial publication that provides financial news commentary and information. In addition to his many roles at TheStreet.com, Mr. Cramer was a partner for 13 years in Cramer Berkowitz and Company, a Manhattan-based hedge fund. A graduate of Harvard College, where he was president of the Harvard Crimson, and Harvard Law School, Cramer worked as a journalist and stockbroker at Goldman Sachs before forming his own hedge fund. He is a co-founder and former columnist of Smart Money magazine and a columnist for New York. He is also the Markets Commentator for CNBC, and appears frequently on Squawk Box and Business Center.

(interview conducted on October 4,2000)

ML: Jim, we'll start with an easy one. What's the stock market going to do in the next year?
JC: The market is at a curious juncture. Up until oil spiked and the Euro declined I thought that we were very much on target for a 1994-style soft landing. Now it looks more like a 1990 scenario, when oil went to unsustainably high levels and we also had rates going higher. That led to a very bad Christmas season and it led to a very tough period for banks, as loan loss reserves went up dramatically. So we're straddling between '94 and '90 right now. I think that one-third of the stocks have bottomed already.

ML: Only one-third?
JC: Only one-third. I'm talking about Alcoa, International Paper, Dow Chemical. Those stocks have bottomed. I am trying to accumulate them. AT&T is now my largest position. Another third, which includes some technology that I regard as classic tech like IBM, are groping for a bottom right now. And then there's another third that I think frankly are sales, if not shorts. They tend to be the stocks that are selling at a 100 to 200 times earnings without a sustainable business plan that may not be able to give us any visibility after this quarter to next year.

ML: What impact will the election results have on the stock market, if any?
JC: First, I have to disclose I'm a card carrying member of the Democratic party and a large giver. Gore is closely aligned with the Rubin faction, which stands for a hard dollar, lower interest rates, and a less aggressive tax posture. There is a sizeable camp of people who are going to begin to rue the notion that there could be a tax cut. So a tax cut, which we normally would think would be bullish for the markets, is against the Greenspan compact with Congress, which is to reduce the deficits and keep interest-rates low. So while I don't think Bush would be so fabulous for the stock market, I don't think he would be so bad.

ML: Jim, what's your own record as a stock picker this year?
JC: We're up 32 percent. It's a very good year for us. We've compounded 24 percent net of all fees.

ML: When you pick a stock what do you really look for? What are some of the characteristics that either attract you to an investment or repel you?
JC: Let's use the example of AT&T. AT&T traded in the 60s, now it's at 28. It's 40 off its high. I like this. I'm buying at the level where there's been a lot of disappointment built into the stock. I check all the First Call notes and I see one lukewarm buy and probably 12 holds and even some sells. That means I've got people who are willing to convert. Most importantly AT&T is a company that when cable stocks have rallied 25 percent has said it is willing to sacrifice its safer long distance business because it really is a cable company. In the parlance of what we say in the investment meetings, I think AT&T's two down, 30 up. This is the kind of stock that we think works in this environment.

ML: Does this mean that that when I see a stock where 12 analysts are following it and 11 have a strong buy and one has a buy I should be suspicious of that stock?
JC: I would tell you that I think the stock in that scenario is a dangerous stock. When everybody loves a stock there isn't anybody who can go from a buy to a strong buy, because they're all clustered at strong buy. We're very oriented toward finding situations where we think a substantial amount of the risk has been removed. We're most interested in Alcoa at 27 with the possibility of taking out a lot of capacity than we would be for a situation like VerticalNet, which everybody loves.

ML: How's TheStreet.com coming?
JC: You know, TheStreet.com is in many ways a great disappointment for me because I'm a hedge fund manager. And in hedge funds we value stocks for what they sell at. When someone asks me what's TheStreet.com worth, I don't say, “Well, the brand is worth a $100 million.” I get no satisfaction out of what we've accomplished because of a stock price [about $4 at the time]. That's the downside. The upside is that we created this unique product. We give you real-time information with an opinion that I think is worth a substantial amount to those who read it. I accept the market's judgment. I think that the market says that there will not be a jump up on advertising on the web; that the web has peaked. I've accomplished a lot in my life, but in the end I'm a $4 stock.

ML: Why did the stock go down so sharply?
JC: Last year our company was run very poorly. That is something nobody is ever supposed to say, but I said it vocally at board of directors meetings. We had a resulting change in management which I think is not at all reflected in the stock price. But we started too high. We went public at 20, and opened at 70. There was just incredible investor enthusiasm that I thought was way overdone. We proceeded to go down for three reasons. The stock market which was loved, loved, loved last year at this time is now disliked by many people, because they're losing money. Reason two is the cohort. Regardless of what we did, we are still a dot-com and that is the suicidal suffix.
Finally, we had to switch gears, from growing like wild-fire to becoming profitable. I would say that we're in the midst of a very difficult downsizing that is meant to be able to produce profitability next year at this time.

ML: Turn it around. What is going to cause it to come back?
JC: We need to be able to cut costs more aggressively than we have. This is a company that had seven million in revenues in the second quarter. We're doing $28-30 million in revenues a year. Now, I'm from the old school which says if you can't make money doing $30 million in revenues let someone else try it. And I think the mandate that our board has given to management is to find a way to make it profitable at $30 million.

The advertisers expect too much from the web and they want our rates to come down.

ML: Give me a model that would work for a dot-com information company.
JC: Let's look at it from the point of the view of the customer first. The customer has expressed a tremendous unwillingness, as we know, to pay for anything on the web. That said, TheStreet.com will get $3.25 million from subscription revenues and should be able to generate twice that. And you should have twice the subscription revenues for advertising. I think you can build a really terrific niche business that way. I think you can make five million on $30 million in revenues. But I can't come up with a scale business apart from Yahoo! and America Online that works. And I don't regard Amazon as working because they're losing billions and they owe a lot of money.
The problem is the advertisers just do not want to advertise on the web. Last week I spent a week with our top five advertisers. In each case they said, “we loved advertising where you were in Smart Money, and we love advertising against your column in New York, but we don't feel comfortable doing the web.”
The people who advertise on the web don't want to brand on the web, they want what's known as direct response. They want to be able to say “Look, we had this many people click on our ad.” So we're held to a higher hurdle. The advertisers expect too much from the web and they want our rates to come down.

ML: Tell me more about the relationship between advertising and subscriptions on the net?
JC: The advertising revenue can't please Wall Street. We went from an all-subscription model to a free site and a premium site model. We did it because we believed that if we went free for part of our site we would draw a huge number of new users and then be able to go to a whole new set of advertisers and say, “Look at this growth that we have.”
When we go to an advertiser they say, “Well, three million people might go to your front page every day, but only 10,000 saw our ad.” And I said, “No, only 10,000 people click through it. They see it If you have the right ad they'll get the brand message.”

ML: You seem to say that there's going to be a pretty big shakedown in the business news and stock information sites, a handful of survivors, and then this industry will presumably grow and prosper. What do you think?
JC: I think that's very right. When you go to see a media director, they’re advertising in six places, because they can't figure out which is the best. The moment the top two sites combine, it’s game over. There's no critical mass in our business right now. Once there is critical mass, one will be the winner. And that one will make a lot of money. But everybody has had too much ego, and everybody thinks their stock is going to come back again.

Q & A with Students
Q: When a company like Conseco or Bank One brings in a superstar CEO how much do you think that really helps the company?
JC: It's very hard to put a valuation on an individual. Gary Wendt, who is a man I got to know when he was at General Electric, moved to Conseco. He was a good hire in a really bad balance sheet situation that I still think is unsavable because I just don't think that it's as easy to turn insurance companies around as people think. Jamie Dimon, another man I respected a great deal when he was at Citigroup, came in to Bank One in a much easier situation. That’s a really good franchise, and the brand was not destroyed. So I think there's a lot to Bank One, although we don’t own it right now.

Q: For the last three years, it's been a growth-driven market. Do you see the cycle turning more toward value stocks? And if so, will value investing be profitable?
JC: I have always been loathe to talk about value investing versus growth investing because those are both disciplines. But the buying that I see in the momentum stock has no discipline whatsoever. Broadcom yesterday traded down from being 230 times earnings to 212 times earnings, which was a terrific opportunity for four or five investment banks to reiterate buy ratings. Well, there's no discipline to owning a stock at 212 times next year's earnings.
It has been tough to be a value investor and maintain discipline, because as they struggled the most undisciplined investors were up 400 percent. In late 1998 I wrote my investors and said listen, we're having a mediocre year. I'm going to get rid of all my value stuff and I am going to play the game. My assets under management were about $300 million. And when I sent that letter out, $103 million came out with it. But my old style would have led to a down year in 1999. Instead, we were up 63 percent. So I know what we did was right.
I just don't see the value camp as being able to pull off the kinds of numbers that the public really wants. The value camp is the camp that is academic in nature and the momentum growth camp is more frenetic in nature and is almost anti-academic. It says there really is nothing else cooking other than the stock. And if the stock goes up I want to be a part of that.

Q: If you had to put the lesson from this under one headline what would it be?
JC: In the long run America is a nation that is willing to pay a super premium for growth versus no growth. And that's now ingrained in the American people so that if you cannot produce that growth it's questionable whether you want to be public.

Q: I wanted to ask about one of your favorites, Cisco. Cisco CEO John Chambers came out many times over the past few months and said everything's great. But the stock is just languishing in the 50s. What do you think?
JC: It's true, Cisco is my favorite. I spent three days there in June, which I regarded as vacation days. Cisco is in a period of multiple contraction, where everybody's a little tired of paying a 100 times earnings and there are a lot of people who are saying that Cisco is an over-owned stock. Cisco's in good shape, but I will not kid you. Cisco is a ridiculously expensive stock. And for me to be in it requires every ounce of conviction. There are some positions that I own because I love management. I will own that stock until CEO John Chambers either tells me that business is bad or steps down.

 

 

 

 

 

		A graduate of the University of Louvain in Belgium, Hendrick Verfaillie joined Monsanto in 1976 in Brussels. A chemical engineer by training, he managed a number of product lines in the European market before transferring to the corporate headquarters in St. Louis. There he took on posts of increasing responsibility. As president and chief operating officer of Monsanto, he was responsible for developing and executing an integrated strategy across the life science spectrum, with special emphasis on agricultural food and nutrition. In 2000, Monsanto agreed to merge with Pharmacia & Upjohn. Several months later, the merged company spun off its agricultural business in an initial public offering. The newly independent company – known again as Monsanto – specializes in developing and manufacturing herbicides, seeds, and biotechnology traits. With 2000 sales of more than $5 billion, Monsanto is based in St. Louis and has 14,000 employees worldwide. Mr. Verfaillie is now president and chief executive officer of Monsanto.

ML: Tell me about the new Monsanto.
HV: Basically, we are quite a unique company. We have fully focused on biotechnology and genomics. We believe that high technology and genomics have the potential to revolutionize the way crops are produced through the use of chemical processes which are now becoming biological processes. We believe that is a lot more sustainable and more productive. We have made very big investments in establishing the technological capabilities, and also in acquiring biotech and genomics companies. We map the genes of plants. We are developing information that we put back into seeds that makes the plant resistant to disease and that makes the plant resistant to insects. So, instead of utilizing pesticides, we simply put information in this combination of information technology and biology.

ML: Our regulatory environment is different from the regulatory environment in Europe and in Canada. Does that have any consequence for the development of biotechnological products that help humankind?
HV: Yes. In the United States, we have very high demands on the data that you have to develop before you get to registration. The Food and Drug Administration, the Environmental Protection Agency, and the U.S. Department of Agriculture are very good agencies with very strong reputations. If they say that something is safe, people will believe it because they have a tradition of being right. In Europe, on the other hand, they have regulations where people do not really know what it is that they have to deliver. As a result, it takes much longer before it gets through the regulatory process. So, for a company that is making very significant investments in research and discovery, the U.S. is a much better place to place your bets than Europe. That is why most of the medical, biotech and genomic research is being done here in the United States.

ML: With populations exploding, are we going to have enough food to feed all the people in the world?
HV: We think we need new technology to be able to feed the world. There are basically three elements that drive the food demand. Number one is obviously the number of people. That number is projected to go up from six billion today to eight billion by the year 2020. Number two is a changing diet. As economies develop, people increase the calories they consume, and they go from a purely vegetarian to more of a meat diet, which, again, will impact the number of crops that are produced. Finally, as the economy around the world improves, people tend to spend more. So we can make all kinds of assumptions on those three factors. Our estimate is that by the year 2020, we will have to produce 75 percent more food than we are producing today.

ML: How? By increasing the amount of calories produced?
HV: Yes. If you look at what has happened in the 50s and 60s, we have had what they call the Green Revolution. The Green Revolution was the arrival of new varieties of hybrids, fertilizers, and pesticides. People were predicting in the 50s that we never would be able to produce enough food for the growing population. Thanks to the Green Revolution the food production accelerated as fast as the population did. But now we need new technology or otherwise, we won't be able to deliver this continuous growth.

Q: What is Golden Rice?
HV: It is basically biotechnology. In the world today, 200 to 300 million people suffer from vitamin A deficiency. Vitamin A deficiency can lead to night blindness, and then, eventually, to irreversible blindness. Through biotechnology, we have been able to develop rice that will produce very high levels of vitamin A. So, by simply eating the normal foods you eat every day, you get sufficient vitamin A to avoid this deficiency and this illness. That is Golden Rice.

For a company that is making very significant investments in research and discovery, the U.S. is a much better place to place your bets than Europe.

ML: Where is it in use now?
HV: It is being developed for Asia. But this is only the first in a long series of possibilities that are being created through this new technology. We are working on, for example, high iron rice and high iron corn. There are two billion people in the world who suffer from iron deficiency. We can develop crops that basically have healthier aspects to them to the point where you can do preventative health care.

ML: Why then, has there been such an emotional, sometimes violent, outcry against genetically engineered crops?
HV: Most of the opposition started in Europe. They have had a number of food safety problems. You may have heard about mad cow disease. But they also have problems with the safety of their blood bank and with the growth hormones that they give children. They have had one problem after another because they do not have a good regulatory system as we do have here in the United States.
Here in the United States, we love science because we know that science has traditionally brought progress and prosperity. In Europe, they are much more concerned about new technology. So usually what you see is that in Europe new technologies, whether in medical technology or in food, or even in marketing and business, are five to ten years behind the rest to adopt technologies. The third element is that in Europe food is something which is part of that culture. So, when you touch their food, they are very concerned.

ML: What is your response to the protesters?
HV: We made a mistake. Biotechnology is really very beneficial to the farm and the farmer loves it. But what we forgot is that the consumer plays a big part. In the past, when we were developing chemicals, as long as we would discover a very good product that would bring a lot of benefits, and we did a good marketing job, we would be successful. Now, the consumer is concerned about the changes that we are making. We did not pay enough attention to the consumer, especially in Europe. So we have started to inform and educate the consumer about the benefits that biotechnology can bring, such as lower use of pesticides, examples like Golden Rice, and sustainability – using less resources to produce the same amount of crops. We are now much more aggressively explaining why biotechnology is good for the world.

ML: But still, there are quite a few educated, knowledgeable protesters in Britain, France, and Germany. What further arguments would you give them to bring them along?
HV: Well, now we are seeing great support from African countries and Asian countries, because they see the benefits. Just imagine, for a minute, that you can develop a crop that is totally tolerant to disease, that is totally tolerant to insects, that is tolerant to drought and that you can plant anywhere in the world. Now that seed in Africa, or in Asia, can be planted and can really increase productivity significantly, and thereby help to feed populations. If you go a step beyond that and have healthier nutrition, then it becomes a real Godsend for those countries. So now they are standing up and saying“Europe, you are well fed, you have plenty of food. You decide what you want to eat, but you are not going to dictate what we can eat, or what technology we can use.”

ML: In its issue of April 10th, the New Yorker reported that "Monsanto has a greater commitment to producing genetically modified crops than any other organization in the world." Is your strategy to continue that commitment?
HV: Yes. We no longer do any chemical research because we believe that the future is in biology. We believe that we can do anything through biology that can be done through chemistry. Biology is a technology that is more sustainable. It is environmentally more friendly. It has much greater promise because it is based on an understanding of the human genome, the animal genome, the plant genome. We have made a bet and we have burned the ships, if you will, because we believe that there is great opportunity.

ML: What biotech products and other agriculture products do you intend to invest the most in?
HV: There are three waves of technology. The first one is the one on the market today, which is basically delivering agricultural productivity gains. We can make plants resistant to disease and to insects, make them higher yielding and resistant to herbicides. The second wave is what we call output traits or quality traits. That is where you change the quality of what the output is. That is where the Golden Rice and high iron comes in. We can put steroids in the crops that help people control cholesterol or that help people control blood pressure, simply by eating the food that you eat every day. The first products will be on the market within a couple of years. The third wave and probably, eventually, the most interesting, is that you can learn to produce any kind of chemicals through biotechnology. We are already doing it with pharmaceuticals. We now produce therapeutic proteins in proteins with monoclonal antibodies that before you had to produce through animal models. It can be done anywhere in the world and it offers very significant opportunities for more sustainable products. You know that whenever you produce a chemical utilizing a petroleum based product that you slowly but surely are using up the resources in the world. On the other hand, if you do it through a biological process you have renewable resources as long as you have sun and water.

ML: Why should a Stern graduate seek her or his future in the agriculture business and the biotechnology business just when it's coming under so much popular attack?
HV: Because where there is challenge, there is opportunity. We are in the process of revolutionizing the way agriculture is done. The agriculture chemical business was a $30 billion dollar business. That's high, but really nothing truly exciting. With biotechnology, we now get not only the input side, but we also get the output side. For example, we have just set up a joint venture with Cargill to produce new feed. Just like you can produce healthier food for humans, you can produce healthier feed for animals. And suddenly, we have an entirely new opportunity driven by biotechnology and genomics in the hundreds of billions.

Q & A with Students
Q: What are your feelings are about labeling?
HV: We are supportive of the FDA position, which is that you only put something on the label when the nutritional quality changes. For example, if there was a peanut gene brought into corn, that would have to be labeled, because peanuts cause allergies. If there is a health risk, you would have to put it on the label. But if there is no change in the nutritional quality of the food that's being produced, then there is no reason to put that on the label.

Q: I think there is a growing trend in the U.S. to consume organic foods. How is this affecting your strategy in the U.S. compared to other areas of the world?
HV: Less than two percent of the food that is being consumed is organic in the U.S. I really like that there is organic food, that there is food produced using chemicals, and that there is food produced through biotechnology. And so the consumer has a choice of what he wants to have. And if you believe that organic food is better for you and you are willing to pay two or three times what regular food will cost you, then please go ahead and do so.

Q: Your company has a strong focus on the sustainability of our planet's limited resources. Is the company investing in research as to possible risk in the equilibrium of our ecosystem?
HV: Yes, we certainly are. If we did not increase productivity, and the population increases by two billion by the year 2020, and on top of that, industry expands and housing expands, suddenly we are going to lose a lot of the forests and wild lands. And so what we are doing is trying to increase productivity, so that we can produce more on fewer acres. Also, through genomics and biotechnology, you use a lot less herbicides, pesticides, insecticides, and so on. And so we see that biodiversity actually increases.

Q: You also talk a lot about your strategies and the way that they can help the Third World and developing countries. How do you propose to ensure that these technological developments find their way there and make an impact where they're most needed, and where the profits may not be the highest?
HV: Let me just give you a few examples. In Africa, we are developing virus-resistant cassava and virus-resistant sweet potato, which are the key indigenous staples in West and East Africa, respectively. We have brought over scientists to learn the technology and we have given them for free the gene to put into their crops. So, we aren't going to make any money. But if it helps demonstrate the benefits of biotechnology very clearly, then we can introduce virus-resistant content. So when we can introduce cash crops that are exported, we can make money from that.