Warren Buffett isn't the only investor ripping U.S. companies for lax or questionable business and accounting standards.
David Tice, manager of a short-only fund for his eponymous firm in Dallas, also has been combing balance sheets and accounting footnotes.
Mr. Buffett, in his letter to shareholders included in Berkshire Hathaway's annual report, didn't name names. Mr. Tice did.
Mr. Tice has been looking at some of the market's hottest companies -- including Yahoo! Inc. and Amazon.com Inc. -- and hasn't always liked what he's seen.
He rails against managers' manipulation of their accounting records. "There's pressure from Wall Street on companies to make numbers and show growth," he said. "There's a push on auditors to let management write down inventories to zero," thus beautifying a company's balance sheet.
When it comes to the Internet, Mr. Tice's biggest concern is a misleading perception about advertising rates.
He knows about Web ads from experience. He advertises his short-only mutual fund, the Prudent Bear Fund, on Yahoo!. He pays $16 per 1,000 viewer hits for a banner ad that stretches across a computer screen, he says. That's far less than the $35 fee per 1,000 hits Yahoo! quoted him when he asked 18 months ago.
Such a drop in ad dollars spells doom for Internet companies, he said, adding that major U.S. corporations such as Procter & Gamble Co. are questioning the worth of Web advertising.
Yahoo! executives disagree. In fact, Yahoo!'s number of advertisers grew to 2,200 in 1998 from 600 a couple of years earlier, said Gary Valenzuela, Yahoo!'s chief financial officer. The number of people -- measured in units of 1,000 -- who look at ads on Yahoo! has even grown slightly, he said.
When discussing ad rates, "to generalize in (cost per thousand) is missing the point of what Yahoo! is today," he said. "We have a whole array of marketing," including fixed fees, payment-over-time and a percentage based on transactions.
Mr. Tice admits that his own record has been mixed. He picked apart Sunbeam Corp.'s inventory records a couple of years ago and showed its manipulation. He also criticized GE Capital Corp. in the early 1990s, but that company bounced back.
Now, Mr. Tice sees a variety of weaknesses in Internet companies. For example, Yahoo! relies on business with sister companies to boost revenue.
It works like this, he said. Japan's SoftBank Corp., the major shareholder in Yahoo! with a more than 30% stake, tells another company it owns, online broker E*TRADE Group Inc., that it should advertise with Yahoo!
"Yahoo! and SoftBank are going to benefit from that," he said. Yahoo! increases its revenue through such ties, he concludes, and Wall Street cheers.
This is strikingly similar to Japanese keiretsu, which are complex -- sometimes misleading -- cross-ownerships among suppliers, banks and customers, he says.
Yahoo!'s Mr. Valenzuela said these are "arm's-length transactions." Advertising from SoftBank and the 20 or so companies of which it owns a piece accounted for 8% of Yahoo!'s revenue during the third quarter last year. That fell to 6% at the end of the year.
At the heart of the disagreement is how a company is valued. Traditional investors such as Mr. Tice, a self-described Cassandra, are shocked that Wall Street chases Internet companies. In the past year, Yahoo!'s shares have traded between 201/2 and 2221/2 per share. Its price to earnings ratio for 1998 was 795, and is estimated to be 473 for 1999 and 365 in 2000, said Brian Oakes, senior Internet analyst for Lehman Brothers Inc. Amazon.com has traded between 127/8 and 1991/8, and the company has not shown any earnings.
"Valuation is subjective," said Abhishek Gami, an Internet analyst, William Blair & Co. LLC, Chicago. The debate centers on "low-risk vs. high-risk" stocks. "How much risk are investors paying for" with overvalued Internet stocks? "For Internet companies, I would say my people are paying for five years of growth."
Over time, the price-to-earnings ratios could catch up to each other. However, he said, "conventional investing says that's outlandish."
The Prudent Bear Fund, with close to $130 million in assets, does not own Yahoo! or Amazon.com. It does, however, hold a couple of Internet stocks that Mr. Tice declined to name.