Stock Option Compensation: An Urgent Warning from Albert Meyer Wall Street's No. 1 Whistle Blower
by Dr. Mark Skousen, Chairman, Investment U
Sunday, November 8, 2006: Issue #603
"Stock option compensation is today's biggest scandal on Wall Street. If your favorite stocks are loaded up with stock options, prepare for disaster!"
Albert Meyer, Wall Street's #1 Whistle-Blower Albert Meyer is a mild-mannered South African analyst who now heads up Bastiat Capital, a money management firm in Plano, Texas.
Meyer may not be a household name, but he's a longtime favorite "inside" source for financial journalists and billionaire investors. He has a specialized skill of warning investors about Wall Street darlings just before they collapse.
He's famous for uncovering tech wrecks in advance, such as Tyco (NYSE: TYC), Lucent (NYSE: LU) and Cisco Systems (Nasdaq: CSCO). And he's warned his clients about investing in Dell Computer (Nasdaq: DELL) and eBay (Nasdaq: EBAY), before they fell out of bed recently. Meyer also has a good track record of finding winning companies and avoiding fallen angels. His background as an auditor and accounting professor has certainly paid off.
Below you'll find nine of Meyer's favorite picks. But first, here are the companies he'll never even consider, and why
The Painful Truth About Employee Stock Option Compensation
When Albert Meyer speaks, more and more investors are listening. I listened for an hour last week as he told me his philosophy of investing.
He scrutinizes publicly traded companies like no one. He spends days going over 10K and 10Q reports with a fine-tooth comb, and reads the small print and the footnotes - all in an effort to screen out most companies and discover the truly undervalued gems with great business models.
He checks out proxy statements, executive compensation, leasing agreements, P&Ls, free cash flow, restructuring charges, acquisitions, debt structure and balance sheets to see if anything is amiss. Needless to say, his screening system removes the vast majority of stocks from consideration.
His screening method also eliminates virtually all companies with a stock option compensation plan for executives and employees. And there's a very good reason why
The Dark Side of Stock Option Programs
Meyer says stock option compensation and buyback programs have destroyed the business model of Broadcom (Nasdaq: BRCM), Cisco, Dell, and many other companies. It almost destroyed Microsoft. He avoids such companies like the plague because they artificially distort the company's fundamentals and undermine their business model.
He hates firms where the top executives are paid mostly in stock options, which is a systematic method of diluting shareholder value, while the top brass pockets enormous compensation packages, mostly hidden from the public eye. He warns shareholders that for these companies, stock buyback programs merely mop up the stock issued to employees and does little to shrink the share count - a disguised compensation payment if properly analyzed.
Furthermore, "Expensing stock options won't stop the distortions," he says, "because many companies have accelerated the vesting of options prior to the rule change and use Black-Scholes assumptions that understate the cost."
In addition, financial journalists and many analysts, at the behest of management, continue to tout earnings excluding the option expense.
After Barron's wrote a glowing report last month on Cisco, Meyer shot back with a letter to the editor (October 23, 2006):
"Cisco spent the bulk of its profits the past 12 years to buy back 1.5 billion shares issued to employees in lieu of cash compensation. Stock-option exercises dilute shareholders. Rather than shrink the share count, as Cisco's CFO claims, Cisco's buybacks merely stemmed the tide of dilution. Stock repurchases that combat dilution are a roundabout way of paying compensation. Cisco employees hold another 1.4 billion stock options. A 22% ownership dilution threatens - not counting any future option grants - unless the company spends the next decade's profits on share repurchases."
His conclusion: "Cisco shareholders are on a treadmill to nowhere."
Albert Meyer's Favorite Companies Avoid Stock Options
Albert Meyer focuses on firms that have little or no exposure to stock option plans. Then, through his meticulous screening process, he looks for companies with a solid business model and excellent prospects for revenues, earnings and cash flow growth. Most of his favorites pay dividends.
The media (The Walls Street Journal and MSN Money) have recently highlighted some of Meyer's stock-option free stocks:
- Seaboard (AMEX: SEB)
- Pilgrim's Pride (NYSE: PPC)
- Fastenal (Nasdaq: FAST)
- Alliance Resource Partners (Nasdaq: ARLP)
- CompuCredit (Nasdaq: CCRT), and
- Ship Finance (NYSE: SFL).
Meyer also likes emerging market stocks that trade on American exchanges because they largely avoid the stock option culture. His picks include several China plays:
- China Mobil Limited (NYSE: CHL)
- PetroChina (NYSE: PTR), and
- Statoil (NYSE: STO), the Norwegian oil giant.
Good investing, AEIOU,
Today's Investment U Crib Sheet
- Meyer named his company after French economic journalist Frederic Bastiat (1801-50), who was unrivaled in exposing popular fallacies, and an indefatigable advocate of free trade and laissez faire.
- Mark devotes an entire chapter to Bastiat and the French laissez faire school in The Making of Modern Economics, available at Amazon. For more information on Albert Meyer and his management firm, go to www.bastiatfunds.com.