It's Almost Spring Can Suitors Be Far Behind?

Think the stock market is getting a bit pricey? You might want to follow Bob Olstein's investment strategy. He never looks at price-earnings ratios, nor does he talk to management to assess a company's financial health. Instead, he searches for companies whose balance sheets and excess cash flow are so alluring that a rich suitor is bound to appear.

"We buy stocks that sell at a deep discount to our estimate of their private-market value," says Olstein, a senior portfolio manager at Shearson Lehman Brothers. In particular, he looks for undervalued companies whose shares are already being bought by a potential acquirer.

Some 19 companies of 300 that Olstein has bought in the past nine years have ended up in buyout deals, including MCA, NCR, and Rio Grande Industries. "I picked them not because I had inside information--I didn't--but because they were greatly undervalued." Olstein's portfolio has outscored the market over the period, racking up a total return of 423%, vs. 246% for the Standard & Poor's 500-stock index.

Here are some companies that Olstein thinks are starting to smell like takeover targets:

-- American Fructose, a major producer of high-fructose corn syrup, trades at $13 a share, but generates excess cash flow of $2.50 a share and has cash on hand of $50 million, vs. long-term debt of $30 million. Archer-Daniels-Midland, the giant food company, has increased its holding of Fructose's Class A stock to 21.5%. At the same time, Archer has boosted its stake in American Maize-Products, which controls 74% of Fructose's B stock, to 7%. Olstein believes Archer will seek to acquire Fructose through Maize. (Class A holders have one vote per share; B holders get 10 votes per share.)

Olstein expects Archer to cut a deal with American Maize. "Archer wouldn't be investing in both Maize and Fructose unless it had a grand takeover plan," he says.

-- Cleveland-Cliffs, the largest independent processor of iron-ore reserves in North America, is near its high of $40 a share. One reason: Investment pro Julian Robertson has succeeded in electing 5 of the 12 directors in a recent proxy fight. (His company, Tiger Management, owns 10% of the stock.) Olstein says Robertson is the kind of guy "who wants to realize the full value of his investment, so we expect he will work toward that goal."

-- JSB Financial, the holding company for New York's Jamaica Savings Bank, is at 17--below its book value of 23. Olstein says the bank's $1.6 billion in assets are greatly underleveraged and could be used to hike earnings. He also sees accumulation in JSB's shares.

-- Pinelands is the owner and operator of WWOR-TV, a television station in Secaucus, N.J. that was spun off by MCA in December, 1990, when it was acquired by Matsushita Electric. The stock sells at 40% below Olstein's estimate of its value. Noting a pattern of accumulation here, too, Olstein says the stock is "definitely buyout bait."

OLSTEIN'S BUYOUT BETS
      Stock                    1991-92    Recent    Est.
                                 high      price    value
      AMER. FRUCTOSE             25  1/4    23     40
      Large corn processor
      CLEVELAND-CLIFFS           40         39     50
      Major mining company
      JSB FINANCIAL              19  7/8    17     30
      Bank holding company
      PINELANDS                  20         14     22
      N.J. TV station
      DATA: OLSTEIN & ASSOC.