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March 1, 2002

Buying Amidst The Ruin

By Kathryn M. Welling

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  • Buying Amidst The Ruin

David Katz, the founder and CIO of Manhattan-based Matrix Asset Management, is a confident guy. Not cocky and obnoxious, but confident. His is the kind of confidence that allowed him to stick with his firm's value discipline even at the height of the dot.com mania, and then to dabble, quite profitably, in tech detrius after the herd declared it toxic waste.

Yet when I spoke with Dave in early January, he was uncharacteristically tentative; just couldn't summon much enthusiasm for anything in his portfolios. But what a difference a few weeks, a few scandals, and market retreat made. When we spoke again late last week, Dave was brimming with ideas and eager to share. -KMW

David, now that the headlines are full of wrack and ruin, you're putting money to work?

That's the way it works. We like the outlook for the next 12 months. We thought it was okay favorable a few weeks ago, but in light of the very sizable overall correction and, more specifically, the number of stocks that got caught, we think the table is set for some very favorable recoveries-returns.

You're not worried that the bad news will become relentless, now that Congress is getting into the act?

We absolutely expect more bad news. But generally, at the tail end of a recession, bad news and company-specific problems are a lagging indicator. So is the new focus on balance sheets and fundamentals. At the end of a recession, problems are going to be more pronounced. But the market is going to muddle through, and if you are buying solid companies that are going to be the leaders in the recovery, you're getting some good prices.

And you have figured out which those are?

We hope.

How?

At Matrix, we use a number of different quantitative business models, which look at a company's historical earnings, cash flow, price-to-sales measures, return on equity, book value. From those, we determine what a businessperson would pay to own and operate the entire company. We then look to buy businesses at one-third off. That determines a basket of statistically cheap companies. At that point, we do detailed qualitative work. Go through the financial statements, speak with management of the company. We'll then speak with competitors, if we feel it's appropriate. Then we'll speak with Wall Street analysts to make sure that we're not missing anything in our analysis. In the end, we'll make a determination whether it is a good long-term business, is focused on enhancing shareholder value and are we getting it at the right price?

You crunch a lot of numbers for yourselves?

Absolutely yes, and one thing that is critical is a detailed balance sheet analysis. We try to get a good understanding of a company's accounting conventions. That focus has been very helpful in avoiding lots of problems over the last few years.

So you don't rely on merely screening pre-digested numbers posted to a database?

No. In many of the recent disasters, the analysts, by and large, knew that the companies were engaged in very aggressive accounting.

But just swallowed the numbers whole, anyway. Thank you!