Dow Jones 9,851.56 + 22.14. 1:38 pm EST, Sat., December 1, 2001  NASDAQ 1,930.58 -2.68 For info, visit access.smallcapnetwork.com .  S & P 500 1,139.45 - 0.75 To be removed, please click here .  Russell 2000    460.78 - 2.55 VOLUME 01: ISSUE 18    Small Cap Digest Weekend Edition: Is Listening To Wall Street Bad For Your Health It is if you followed the advice of the Wall Street gurus on Enron Corporation (NYSE: ENE ).  Chances are your health and your pockets are feeling a bit queasy.  The end is very near for once mighty energy giant .  The company is reported to be filing for Chapter 11 bankruptcy protection sometime next week.  It would be the largest bankruptcy in US history.  The 52-week high on the stock was $84.88 which would give the company a market capitalization well over $63 billion dollars at its peak.  The demise of Enron really dwarfs all the dotcoms that are now in the wastelands. Everyone wants to know how did this happen?  How can a company of such stature and size fall in such a short amount of time.  The auditors, investment bankers, and regulators gave no warning or indications whatsoever..  The fall of Enron has created some awful consequences for many parties.  Many of the 20,000 employees at  the company have seen their nest eggs cracked into a million pieces.  The institutions that own this stock such as Janus, Putnam, AXA Financial , and Fidelity will ultimately provide a lower return for investors due to the company's collapse.  Where does the money for the institutions come from? It comes from the pockets of the great people that work in this country.  Something went terribly wrong, so wrong that the "smart money" was duped into buying and then holding the shares as the problems at Enron were brewing.  The employees and investors are the obvious victims of the company's demise.  Unfortunately the affects are much wider and far worse than anyone ever could have imagined.  Below are some the larger losses that will be incurred do the Enron collapse.  There are too many to list but the point is that this event has an overwhelming affect that will trickle down into the lives of people around the world.    Australia's four major banks succumbed on Friday to the scourge of bad debts flowing from troubled Enron Corp detailing exposures totaling US$350 million. Abbey National surprised investors with news of its 115 million pounds exposure to stricken U.S. energy trader Enron. Dutch bank ABN AMRO NV might have to take a provision of 110 million euros due to its exposure to U.S. energy trader Enron. Dutch insurer Aegon NV said on Friday its gross loan exposure to energy trading group Enron and its affiliated was around $300 million. A complete collapse of Enron Corp would cost the U.S. insurance industry $3 billion or more, analysts warned on Friday, as insurers face losses on Enron's bonds and could see large claims on various types of policies connected to the firm's operations. Insurer Chubb Corp. said on Friday it has $220 million in maximum pre-tax exposure to surety bonds relating to Enron Corp. The question remains, how did this happen?  How could no analysts, bankers, investors, auditors, or government regulators see this coming?  A report by Reuters Friday titled "Analysts washing their hands of Enron"  shows how slow the analysts were in cutting ratings on Enron.  Just how slow were they?  Let's take a look at the comments and timeline of UBS Warburg analyst Ronald Barone.  The SmallCap Digest will take you on the Enron Express through the UBS tunnel starting on July 12, 2001.   In a report titled "ENRON: 2Q Analysis; Raising '02 and Lowering Price Target" on July 12, 2001:  "we are raising our recurring 2002 EPS estimate to $2.15 from $2.10" this is hardly newsworthy but somewhat strange is that the target on this "Strong Buy" has been lowered "our new target $70 is arrived at by applying 32-33x multiple to our new $2.15 estimate of the company's recurring 2002 EPS".  Further, "To be highly conservative, given its limited revenue streams and expectations for continued operating losses for some time, we are now giving now value to its broad band services division." Enron is trading at $49.22 with a Strong Buy.  In a report titled "ENRON: Comments on Skilling Departure; Lowering 18-month Target to $60/Share" on August 15, 2001:  A summary is given on the departure of Jeff Skilling, "Yesterday after the market close, Enron announced that its President and CEO is resigning from his management position and board seat for personal reasons".  The timing of this departure seems more business than personal although it would've been bad for Mr. Skilling's personal health if he did stay on board. This next section is laughable, "Management was adamant that there are no hidden or undisclosed issues at Enron (such as other shoes to drop) that led to Mr. Skilling's departure.  It reaffirmed that the move is purely a personal one and maintained its recent earnings guidance." The target on Enron is lowered to $60 per share but the company is still a strong buy.  "Given the current increased level of uncertainty at the company (as well as continued skepticism throughout the energy merchant patch), we are lowering our multiple assumption on Enron to roughly 28X our $2.15 projection of its 2002 EPS.."  The company is fine from an earnings perspective but the valuation multiple has to be lowered due to uncertainty.  How does that work?  Wouldn't uncertainty jeopardize performance? There is just too much double speak and that you something you will not get from the SmallCap Digest. Enron is trading at $42.93 with a Strong Buy.   In a report titled "ENRON: Dust Settling; Likely Headed Higher Than Lower From Here on Out" on August 17, 2001:  Enron's senior management team held a dinner with some analysts in New York the previous day.  It must've been an incredible dinner because the next day, Barone writes "In line with its message earlier this week, management emphasized that Jeffrey Skilling's departure was voluntary and for personal reasons. We have no doubts about this.  The company also emphasized that. although there are challenges ahead, there are no other shoes to drop and that Enron remains poised for unprecedented growth".  The dinner supposedly had some breakthroughs, "In response to feedback, management will be working toward a more candid relationship with the Street with a further opening of lines of communication". Even in August the management at Enron were singing the songs of joy, "The company dispelled rumors of credit issues, noting that it has already met with credit agencies and has been in contact with all of its global lenders (there are no issues)".  Unfortunately for investors these rumors did become true.  This dinner seemed to be very exclusive and very intoxicating, "Though the road back to having an eight handle will be a long one, we believe the dust is officially settling on the Skilling departure and that ENE shares are in fact nearing a bottom (if not there today)". Enron shares were trading at $36.85 at the time with a Strong Buy recommendation.  The praise of Enron continues, "With a heightened focus on shareholder desires, solid bench strength (and its global network franchise soundly in place), we believe Enron will be heading back on track to delivering a cleaner and more openly communicated financial performance". "With the dust settling, we would be aggressive buyers of ENE at current levels.  This is particularly true for individuals with a 12-18 month time horizon".  Enron is trading at $36.85 with a Strong Buy.   In a report titled "ENRON: Progress; But Much More Work Ahead - 12-month Target now $47 Per Share" on October 17, 2001  The previous day Enron reported third quarter results, "We believe all this bodes well for improved earnings visibility and performance assessment, suggesting that the company is making progress at getting back on track".  However, despite the bullish comments the target price is dropped from $60 per share to $47, "We believe all these factors, when combined with substantially lower group / market multiples, warrant a reduction in our target ENE multiple to 22x projected 2002 EPS".  Does anyone else see a patterning of adjusting multiples?  The core EPS is maintained but its the multiple that gets changed.   Why is that?  Justifying multiples are much easier whereas adjusting actual EPS estimates requires breaking down business segments and actually conducting some serious due diligence.  Multiples can change for any reason on earth and it is this flexibility that allows the spinmeisters to come up with the adjusted targets and justification for valuing a company at a certain value.  That is why the SmallCap Digest adjusts our expectations of companies we feature by looking at their performances in core operations rather than sit there and invent multipliers that compensate for a lack of due diligence.  Enron is trading at $33.84 with a Strong Buy.   In a report titled "ENRON: A Step in the Right Direction; Lowering Ests / Target to be conservative" on November 1, 2001  At the time of this report it was just discovered that Enron entered into some shady dealings through partnerships the company had established.  "Given the questionable nature of these partnerships, the past level of insider selling (and the overall importance of ENE in the U.S. gas and power markets), we are not surprised that the SEC has rapidly evolved its inquiry into a formal investigation while moving the case to Washington".  It appears that an analyst may be getting upset at Enron.  "Moreover, with the recent deterioration in ENE share price, we would not be surprised to see S&P and Fitch lower their debt ratings on Enron a notch or so to a level still within investment grade status."  The analyst, Ronald Barone at UBS Warburg is not surprised by these developments.  In this report he reminds investors, "As detailed in our October 17th and October 25th notes, there remain several fundamental issues that we believe need to be addressed before the clouds can clear above the ENE skies".  Despite some disparaging remarks about Enron he maintains, "In short, though there are no guarantees and headline volatility will likely remain the norm for some time, we dispassionately continue to believe that the odds of Enron becoming illiquid are low". The new target on the stock is lowered to $29 per share from $47 based on a reduction of multiple from 22x to 15x 2002 EPS.  If you are an Enron shareholder you may be upset you lost over two thirds of your money since July but rest assured though because, "As noted in past write-ups, we will continue to monitor this situation actively".  Enron is trading at $12.50 with a Strong Buy.   In a report titled "DYNEGY & ENRON: Just What the Doctor Ordered; Reiterate Strong Buy" on November 12, 2001  In this report James Yannello CFA of UBS Warburg takes the lead helping investors understand the bailout of Enron by Dynegy, " Also, early indications are that the credit agencies have blessed the plan".  This report is focused on Dynegy but the reason for its inclusion in this SmallCap Digest weekend edition is attributed to this line, " In short, deal or no deal and regardless of how one analyzes it, we see limited downside in Dynegy shares at current levels with material upside over the intermediate-to-long-term and thus reiterate our Strong Buy rating". At the time of publication Dynegy was trading at $38.76  with the shares closing yesterday at $30.35   In a report titled "ENRON: Flavor From the Call; Lowering Estimates to More Conservative Levels" on November 15, 2001  A conference call was held the previous day to discuss the status of the company since the announced merger with Dynegy.  In this report we get preliminary valuation estimates on what the combined entity may be worth, "By applying the 25x market multiple against $3.50, we arrive at a 12-month price target of $88 per new DYN share".  So Enron deserves a 15x 2002 multiple according to the report on November 1st yet the combined entity deserves a multiple of 25.  In addition Dynegy was valued at 15x 2002 EPS projection of $2.60 on November 12, 2001.  How in the world does the combined entity justify such a high multiple?  Enron is trading at $9.91 with a Strong Buy.   In a report titled "ENRON: Lowered Rating to Hold" on November 28, 2001  The game is finally over, " We have lowered our rating on Enron to Hold from Strong Buy.  As evidenced by our well-below-the-street EPS projections and warnings of high-risk in multiple past notes, we have been highly cautious of the precarious state of Enron ever since this mess accelerated.  "Our price target on Enron is being lowered to $1 per share". Enron is trading at $4.14 with a Strong Buy. What happened with Enron illustrates that no company is too big too fall and that diversification is critical.  It doesn't matter if the company investors' own is a small cap, mid-cap, or large cap.  All that matters is that the stock you own is in a good company.  Enron's demise was unforeseen but at the same time diversification will allow investors to whether the storm that is inherent in investing.  The SmallCap Digest is committed to bringing our readers investment ideas that help them diversify into quality small cap companies.  We conduct due diligence with a fine tooth comb on companies we recommend to our subscribers. We hope that the summary of UBS Warburg's coverage of the Enron fiasco teaches an important lesson and that there is no substitute for good due diligence.  If is important to note that UBS Warburg was one of many investment banks that dropped the ball.  However, looking at the comments made by the firm on Enron over the past five months drove the editors at the SmallCap Digest to bring the story to the           D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a registered investment advisor or broker-dealer. 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