"The Market Is Scared"


Nelson Peltz, chairman and CEO of investment firm Triarc Companies (TRY), has built a corporate empire using junk bonds to acquire companies, most notably American Can in 1986. For the last two years, Peltz has been looking to pick up another company with about $700 million in accumulated cash. But he has held back, believing there was still too much overvaluation in stock prices.

He's looking prescient today. And even after the latest blow to the market -- WorldCom's restatement of profits -- Peltz is still watching and waiting. He thinks valuations remain too expensive. Recently, BusinessWeek Finance Editor Emily Thornton spoke with Peltz about his strategy. Here are edited excerpts from their conversation:

Q: Has the stock market hit bottom yet?

A: No. People are not comfortable with the numbers and they don't believe what they hear. As a result, who knows where the bottom is? Prices are still too high if the numbers are honest, because I don't think anything is moving in the right direction. Also, you've got things [influencing the market] that have never impacted a market that I remember. Domestic terrorism is clearly a new issue.

I used to naively believe that you could really rely upon the validity of the numbers of U.S. companies, and I've been astounded [by the recent scandals]. People are getting real nervous, and that goes all over the sectors and into [many] different sizes of company.

You're used to seeing...a CEO pulling a fast one here or there in a small company. But now you're seeing it all over the place. And then you have one of the lily-white icons, Martha Stewart, being ripped to pieces daily. If I don't know who to rely on to put my flowers in the middle of the table, what can I rely on anymore?

Q: What measures do you use to judge if companies are expensive?

A: I like to look at enterprise value vs. EBITDA [earnings before interest, taxes, depreciation, and amortization], less capital expenditures. I don't see those ratios coming into line. Other than housing, I don't see a lot of revenue growth coming. Interest rates are real for the first time. They're low, but they're real.

Q: So you believe the stock market is still headed south?

A: We're going down. I don't understand why the stock market was up after September 11. That befuddled me. Some of this could be a correction from that. Maybe reality has set in. We're still moving into negative ground.

Q: Where have you been keeping most of your portfolio?

A: We've been [much more] in U.S. Treasuries. If I could find something safer, I would invest in that. All I look for is that the return on my assets is a plus. That's all I ask for. There's nowhere else to go right now. The market is scared.

Q: When do you think the stock market will rebound?

A: The economy is going to have to recover. We've gotten into a "show me" investor mindset. Historically, you've seen markets go up in anticipation of the economy going up. I think we'll see just the opposite this time. The economy has to go up for a while before the market goes up because people are so skeptical.


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