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Successful Investing Q&A
Q. What's your opinion of Bristol-Myers Squibb Co.?
I've read that its research efforts are really paying off. J.R., Chicago, IL.
A. The
world's No. 5 pharmaceuticals firm is working hard to expand
its drug pipeline because generic competitors have already snatched
business form some of its popular drugs.
Most recently, the Food and
Drug Administration is deciding whether generic forms of its
diabetes drug Glucophage will soon be permitted.
Shares of Bristol-Myers Squibb
(BMY) are down 20 percent this year, following last year's 17
percent gain. However, the company did match Wall Street estimates
with high third-quarter profits, thanks to strong sales of Glucophage
and the blood-clot fighter Plavix.
Best known for Bufferin and
Excedrin products, the firm is making major changes. The U.S.
Justice Department recently approved sales of its Clairol hair
products division of Procter & Gamble for $4.95 billion.
Its Zimmer Orthopedics division was spun off to shareholders
earlier this year.
The company paid $7.8 billion
for the pharmaceuticals division of DuPont Co., where it is cutting
40 percent of the workforce. It took a 20 percent stake in the
biotechnology firm ImClone Systems Inc.
Bristol-Myers Squibb expects
the file five new drug applications with the FDA within a year
and launch three new potential blockbuster drugs annually between
2003 and 2005. Credit is being given to Peter Ringrose, the chief
scientific officer who took four years ago. He wants the firm
to depend on in-house research.
Approval has been sought
to market Aripiprazole, a schizophrenia drug. Other drugs for
which it will soon seek approval are Vanlev, an anti-hypertension
drug; Erbitux, and anti-cancer drug from the firm's deal with
ImClone; Des-Quinolone, an antibiotic; and Atazanavir, a once-a-day
HIV treatment. It will seek approval in 2003 for rheumatoid arthritis
treatment CTLA4Ig.
Based on these prospects,
stock of Bristol-Myers Squibb currently receives a "buy"
rating from Wall Street analysts who track it, according to the
Boston-based First Call research firm. That consists of 10 "strong
buys," eight "buys" and 10 "holds."
Earnings for the company
are expected to increase 10 percent this year, vs. a 16 percent
gain for the overall pharmaceuticals industry. Next year's projected
8 percent rise compares to 14 percent forecast for its peers.
The five-year annualized growth forecast of 12 percent for Bristol-Myers
Squibb is less than the 15 percent projection industry wide.
Q. Would it be wise to put $20,000 in American Balanced
Fund or in Income Fund of America? -
N.B., via the Internet.
A. You've
come up with two fine choices.
Both are "balanced"
funds investing in stocks and bonds, though Income Fund of America
holds a bit more cash, owns convertible securities and is less
volatile. Both have solid results, though returns of the more
aggressive American Balanced Fund have been somewhat better lately.
The
$8 billion American Balanced Fund (ABALX) gained 11 percent over
the past 12 months to rank in the top 4 percent of balanced funds.
Its three-year annualized return of 9 percent places it in the
top 6 percent of its peers.
The $20 billion Income Fund
of America (AMECX) is up 10 percent over the past 12 months to
place in the top 5 percent of balanced funds. Its three-year
annualized return of 6 percent puts it in the top one-fourth
of its peers.
Balanced funds are considered
a safe haven because they have a bond stake to carry them through
the times when stocks are beaten up.
"These are worthwhile
funds, through Income Fund of America might be better for investors
who want a high yield because it can invest in below-investment-grade
debt," observed William Harding, analyst with the Morningstar
research firm. "American Balanced is your plain vanilla
balanced fund, while Income fund seeks higher yield."
Largest stock holdings of
American Balanced are financials, industrials, services and health.
Average credit quality of its bonds is AA, with average duration
4.5 years. Six percent of portfolio is in cash. Top holdings
are AT&T, Bristol-Myers Squibb, Allstate, U.S. Treasury notes,
Texaco, Philip Morris, Genuine Parts, McDonald's, FNMA and H.J.
Heinz.
Largest stock holdings of
Income Fund of America are financials, industrials, utilities
and staples. Average credit quality of bonds is BBB, with average
duration 4.6 years. It has 13 percent in cash. Top holdings are
Philip Morris, R.J. Reynolds Tobacco, Consolidated Edison, Dow
Chemical, Wachovia, J.P. Morgan Chase, Weyerhaeuser, Albertson's
and George-Pacific Timber Group.
American Balanced "A"
shares and Income Fund of America "A" shares each require
5.75 percent "loads" (sales charges) and $250 minimum
initial investments.
Q. I have 400 shares of McDonald's Corp. What are
the prospects, especially in light of the troubles in the world's
economy? J.D., Richmond, VA.
A. Shareholders of the maker of the Big Mac and the
Quarter Pounder deserve a break but may have to wait a while
to get it.
Shares of McDonald's
(MCD) are down 23 percent this year, following last year's decline
of 15 percent.
Being an international
trailblazer means prime locations and a head start on the competition,
but it's a difficult time to run 29,000 outlets around the globe.
Stumbling foreign currencies, troubled economies in Latin America
and Asia, and lower European sales in the wake of mad cow disease
have taken THEIR toll this year.
This weakness will
carry over into 2002, with the company doing worse than analysts
predicted earlier.
The chain expects to
open 200 fewer restaurants next year than this year, take a corporate
restructuring charge of more than $175 million in the fourth
quarter and cut $100 million in operating expenses beginning
in 2002. It will buy back $5 billion worth of its stock, a move
that has prompted credit rating agencies to lower their ratings
on its debt.
Consensus opinion of
shares of the world's largest restaurant company from Wall Street
analysts is currently between a "buy" and a "hold,"
according to the Boston-based First Call research firm. This
consists of five "strong buys," three "buys,"
five "holds" and one "strong sell."
Fast-food chains, while
not recession-proof, perform better than conventional restaurants
in down economies. McDonald's is introducing a wider variety
of low-priced menu items everywhere and adding non-beef selections
such as chicken and pork sandwiches in Europe.
Management is optimistic
about its 1,060 non-hamburger restaurants under the names of
Boston Market, Chipotle Mexican Grill and Donatos pizza, as well
as the new small-store McSnack test concept introduced in a Houston
Wal-Mart. Boston Market, acquired by McDonalds in mid-2000, will
open its first new stores in four years.
The board of directors
approved a 4.7 percent increase in its annual dividend, bringing
it to 22.5 cents per share.
McDonald's earnings
are expected to decline 7 percent this year, versus a 1 percent
gain for the restaurant industry. Next year's projected 9 percent
gain compares to an expected 9 percent gain industry-wide. The
company's likely 12 percent annualized growth rate over the next
five years is slightly less than the 14 percent forecast for
its peers.
Q. I own 200 shares of General Motors. I see the
company has been offering special car financing and recently
won an award from Motor Trend magazine. Are prospects looking
up, or is it unlikely to do better until the economy does? H.H., via the Internet.
A. While the nation's largest automaker has lately
been stealing market share from rivals Ford and DaimlerChrysler
thanks to a revamped product line, times are tough throughout
the industry.
The recent firing of
Ford chief executive officer Jacques Nasser and his subsequent
replacement by family member William Clay Ford Jr. is indicative
of the current pressures everyone is facing.
Stock of General Motors
(GM) is down 9 percent this year, following a 27 percent decline
last year. The company reported a $368 million loss in its most
recent quarter and its profit before charges was down 54 percent.
Its high profile "0-percent
financing" incentive program launched shortly after the
terrorist attacks has moved cars off the lot but hasn't helped
company profits. There had already been significant discounts
on vehicles, and analysts expect decreased sales next year as
a result of this aggressive program.
GM has been closing
factories and reducing its work force to stay competitive in
a recessionary environment. It also recently accepted a $26.8
billion offer from EchoStar Communications for its Hughes Electronics
unit, which operates the lucrative DirecTV franchise. That deal
must be approved by federal regulators.
As you noted, the new
GMC Envoy, considered a crucial product for the company's bottom
line, was selected as Motor Trend's 2002 Sport/Utility of the
year. The company spent a lot of money to develop its new line
of trucks, which should pay big dividends. Profit margins for
trucks are nearly double those of cars.
In addition, GM is
emphasizing electronics through a partnership with AOL Time Warner
in order to bring Internet access into GM cars.
The consensus rating
on GM stock remains just a bit better than a "hold,"
according to the Boston-based First Call research firm. That
consists for two "strong buys," three "buys"
and 11 "holds."
GM has a fourth-quarter
earnings forecast of 50 cents per share, while both Ford and
the U.S. operations of DaimlerChrysler are in the red.
GM earnings are expected
to decline 64 percent this year, versus an 84 percent drop for
the automobile industry.
It is projected that
GM earnings will decline 43 percent next year and its five-year
annualized growth rate will be 5 percent, both in line with industry
trends.
Q. I own shares of Nokia Corp., which used to be the
greatest thing on earth. I know that cell phones gained prominence
during the terrorist attacks of Sept. 11. What's the outlook
for Nokia stock? G.L., Los Angeles,
CA
A. The
importance of cellular phones was dramatized by messages that
came out of the World Trade Center and the airplanes involved
in the attacks that tragic day, as well as their increased use
when traditional land lines were jammed with calls in New York
City and Washington, DC.
It's expected that
a greater number of people will consider cell phones a worthwhile
security measure. But while there's evidence of that in the recent
improvement in the value of Nokia (NOK) shares, they've still
experienced a tough year due to the slow economy.
Traded here as American
Depositary Receipts, Nokia shares are down 63 percent in value
this year, following last year's 9 percent decline. In their
heyday, they rose 220 percent in 1999 and 251 percent in 1998.
Due to the firm's high
quality and competitive edge, the consensus rating of attractively
priced Nokia shares from the Wall Street analysts who track them
is a solid "buy." According to the Boston-based First
Call research firm, that consists of 10 "strong buys,"
13 "buys" and four "holds."
Nokia holds 35 percent
of cell phone market share, ahead of second-place Motorola's
15 percent. It markets phones in more than 130 countries, with
sales outside Europe accounting for more than half of its revenues.
While rivals carry heavy debt loads, Nokia holds three times
as much cash as long-term debt. It is also a supplier of mobile,
fixed and Internet protocol networks and related services.
A big concern is that
the number of cell phone handsets likely to be sold this year
continues to decline. In addition, Motorola has beaten out Nokia
in the initial shipping of the next generation of advanced phones.
With increased competition from Asia and other parts of the globe,
Nokia must work hard to maintain its advantage. It may also have
to supply financing to some troubled service-provider customers,
which would hurt its bottom line.
Nokia earnings are
expected to decline 16 percent this year, versus a 234 percent
decline for the communications technology industry. Next year's
earnings for the company are expected to increase 11 percent.
Its projected five-year annualized growth rate is 20 percent,
versus 22 percent for its peers.
Q. What is your opinion of Ariel Appreciation Fund
for a traditional individual retirement account? E.S., Carlisle,
PA.
A. It goes its own way, and the results have paid
off handsomely for investors.
This fund avoids technology
and prudently pricks stocks that aren't typically included in
the portfolios of most mid-cap funds.
The $560 million Ariel
Appreciation Fund (CAAPX) has gained 8.51 percent over the past
12 months to rank in the top 3 percent of all mid-cap funds.
Its three-year annualized return of 8.41 percent places it in
the top half of its peers.
Value investor Eric
McKissack, manager of the fund since it was initiated in late
1989, doesn't like to pay more than 60 percent of what he thinks
a company is actually worth. His fund is also socially responsible,
selecting companies with positive goals that are active in their
communities and dedicated to diversity in the workplace.
"McKissack is
a skilled manager who's good at talking about his investment
style and he often picks companies that are not household names,
such as his stake in the Lee Enterprises publishing group,"
observed Peter Di Teresa, senior analyst with the Morningstar
research firm. "While Ariel Appreciation had a modest loss
in 1999 because that was a great year for growth investing, it
has generally had steadier returns than a lot of its competitors."
This fund would be
a good addition for many investors whose portfolios are loaded
with large-cap stocks. Moderate-risk investors can expect the
fund to lag in growth rallies but do well in the long run. It
has low portfolio turnover and is tax efficient.
More than one-third
of the Ariel Appreciation's holdings are in services stocks,
with other large concentrations in financials and durables. The
portfolio is generally concentrated in about 40 stock names.
Its top holdings were recently McCormick, MBIA, H&R Block,
Centurytel, XL Capital Class A, MBNA, Rouse, Apogent Technologies,
Lee Enterprises and SunGuard Data Systems.
This "no-load"
(no sales charge) fund requires a minimum initial investment
of $1,000. Its annual expense ratio of 1.31 percent is quite
reasonable for a fund that applies many screens to its investment
choices.
Q. Can I take a stock distribution from my individual
retirement account instead of selling the stock? I can save the
broker fee and keep the stock in my separate portfolio? A.K.,
Cicero, IL.
A. You're
right. You don't have to sell the stock first and take the cash.
You can distribute
the stock as it is, pulling it out of your IRA and putting it
in your regular taxable brokerage account, explained Ed Slott,
CPA and editor of Ed Slott's IRA Advisor (www.irahelp.com) in
Rockville Centre, N.Y.
"People frequently
ask if they can distribute their stock as is, and the answer
is yes," said Slott. "You'll get an IRS form 1099 for
a distribution and you'll still pay full tax on the value of
the stock on the date of the distribution."
You report this disbursement
as ordinary income, just like a cash distribution. Your new basis
in the stock for capital gains purposes when you sell it later
is the trading price at which the shares were disbursed from
the IRA.
"If it's a stock
you wish to hold and you don't need more cash to live off, this
can make sense from the standpoint of saving on the broker fee,"
concluded Robert Greisman, tax partner with BDO Seidman LLP in
Chicago.
Q. When my grandson was born 11 years ago, I started
an account for him with the Nicholas Fund. But I now wonder if
I should switch to some other fund to give him a head start for
college. What's your opinion? B.K., via the Internet.
A. This
fund has undergone a metamorphosis since you bought it, leaving
it with a muddled identity. Timing of recent portfolio moves
couldn't have been worse.
The $3.7 billion Nicholas
Fund (NICSX) was a growth fund that shied away from technology
stocks, and was therefore likely to hold up better than its peers
when technology swooned.
Unfortunately, it increased
its tech exposure and hired a tech analyst-just in time for the
bursting of the tech bubble. That hurt performance. While tech
is only 15 percent of overall portfolio, the fund no longer stands
out from its peers as less volatile.
The Nicholas Fund was
down 18.85 percent over the past 12 months to rank in the top
one-fourth of large growth and value funds. Its three-year annualized
decline of 1.87 percent places it in the lowest 10 percent of
its peers.
"If you want a
growth fund that doesn't have a whole lot of tech, the Nicholas
Fund would be a good choice," explained Kelli Stebel, equity
fund analyst with the Morningstar research firm. "But if
you're looking for a more conservative growth fund, you can go
elsewhere."
It does, however, have
a low annual expense ratio of 0.73 percent. Albert Nicholas,
who founded the fund in 1969, and son David run it. David has
taken over more of the day-to-day management as his father nears
retirement.
The Nicholas Fund's
largest holdings are financials, services and health care. Top
stocks are Mercury General, Berkshire Hathaway Class A, Guidant,
Apogent Technology, Sprint, Health Management Association, Protective
Life, Fifth Third Bancorp. USA Networks and American Home Products.
This "no-load" (no sales charge) fund requires a $500
minimum initial investment.
Q. I'm 76 years old, married, retired and thinking
of switching from a money-market fund to I bonds. Is this a good
idea? If I buy an I bond today, will the interest stay the same
until I cash it? A.D., via the Internet.
A. The plunge in yields of interest-rate vehicles
has boosted popularity of these innovative bonds, their sales
doubling to $30 million a week.
The Series I bond,
whose I stands for "inflation-indexed" because its
return is tied to inflation was introduced by the government
in September 1998.
Its return is composed
of a fixed rate that stays with the bond its entire life, plus
a variable rate is changed on Nov. 1 and May 1. The fixed rate
on new I bonds is 2 percent and the variable rate 2.4 percent,
providing a combined return of 4.4 percent.
"A 76-year-old
should realize when he buys an I bond that the money will be
locked up and unavailable for the first six months, and also
that if he doesn't hold it for five years he will lose three
months of interest," concluded Daniel Pederson, author of
"Savings Bonds: When to Hold, When to Fold and Everything
In-Between" and president of the Detroit-based Savings Bond
Informer (www.bondhelp.com) company that provides customized
reports.
Q. I have two granddaughters and I want to invest
$2,500 for each one. In the past, I have invested in Stein Roe
Young Investor Fund for my other grandchildren. Would you suggest
this for the long term? J.R., via
the Internet.
A. Congratulations on your new grandchildren and for
taking such an active interest in them. They, and their parents,
are fortunate.
While this fund can
be an excellent way to introduce kids to the world of investing,
its most recent results provided a rather rude introduction because
of weak-performing growth stocks.
The $929 million Stein
Roe Young Investor Fund (SPYIX) declined 36 percent over the
past 12 months to rank just below the top one-fourth of large
growth funds. Its three-year annualized return of 3.70 percent
places it at the midpoint of its peers.
You can find out more
about the largest youth-oriented mutual fund on its Web site
www.younginvestor.com. Both its site and its printed educational
materials are specifically geared to youngsters. Portfolio managers
Dave Brady and Erik Gustafson invest in stocks that they believe
affect the lives of children, such as Mattel and Walt Disney,
though they have a lot of leeway in making those selections.
"This fund has
smart, consistent management that has done a decent but not spectacular
job over the long run," said Brian Portnoy, analyst with
the Morningstar research firm. "While owning stocks such
as Citicorp keep it well within the large-cap space, it has been
repositioned to take advantage of smaller-cap stocks as well."
Stein Roe Young Investor
Fund employs a "buy and hold" philosophy to maximize
tax efficiency. Its biggest emphasis areas are technology, financials
and services. Top holdings were recently Household International,
Citigroup, Johnson & Johnson, Safeway, Microsoft, General
Electric, Walgreen, Mattel, Kinder Morgan and Wells Fargo. This
"no-load" (no sales charge) fund requires a $2,500
minimum initial investment.
Both Brady and Gustafson
manage their own concentrated versions of this fund. Brady runs
Stein Roe Large Company Focus (SRLFX) and Gustafson is in charge
of Liberty Growth Stock Fund (SRSAX). Both of those funds have
good track records.
Editor's Note: Andrew Leckey answers questions only through this column. Address inquiries to Andrew Leckey, P.M.B. 184, 369-B Third St., San Rafael. CA 94901-3581, or by e-mail at andrewinv@aol.com
