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Successful Investing Q&A
New Leader Could Turn Around Troubled Tyco
Q. Despite its many troubles, I'm still hopeful that Tyco International could emerge a winner. What's the outlook for the stock? R.B., via the Internet
A. No one is more hopeful about the prospects for
that troubled international conglomerate than its new chief executive
officer.
Edward Breen, who collected
a $3.5 million signing bonus to leave his job as president of
Motorola Inc., could receive tens of millions of dollars more
if he succeeds in accomplishing a turnaround at Tyco International
(TYC).
Shares of this firm
that makes products ranging from diapers to ADT burglar alarms
are down 79 percent in value this year, following last year's
6 percent gain.
The no-nonsense Breen
replaced Dennis Kozlowski, who resigned his post just before
an indictment on criminal charges of avoiding sales taxes on
artwork purchases. Kozlowski, one of America's most richly paid
CEOs, reportedly received $135 million in interest-free or forgiven
loans and other payments from the company over five years, including
a $19 million gift to help him buy a Florida estate.
Stories abound of the
bounty Kozlowski received, such as the $6,000 shower curtain
in the $18 million New York apartment the firm purchased for
him.
Breen has wasted no
time in cleaning house.
The company's chief
financial officer and interim general counsel were on their way
out shortly after his arrival. With Tyco's accounting practices
long criticized and a Securities and Exchange Commission probe
underway, Breen also widened management's own company-wide investigation
beyond the dealings of Kozlowski. He named an executive in charge
of corporate governance and says he may change the board's composition.
He'll have to beef
up the company's research and development efforts, which lag
behind those of other large industrial companies. Many scientists,
technicians and researchers were cut from the payroll during
the Kozlowski regime. In addition, the company's debt has been
downgraded to just above junk level and its returns on investment
remain low.
On a positive note,
Tyco recently spun off its financial services business, bringing
considerable cash to meet its near-term liquidity needs.
The consensus rating
on these depressed Tyco shares is currently a "buy,"
according to the Boston-based First Call research firm. That
consists of four "strong buys," eight "buys"
and one "hold."
Tyco earnings are expected
to decline 29 percent this year, compared to a 6 percent gain
for the diversified industrial category. Its projected gain for
next year is 8 percent versus 3 percent industry-wide. The five-year
annualized growth rate is forecast as 15 percent, which is about
1 percent higher than its peers.
Merck May Remain Anemic This Year
Q. Does drug company Merck & Co. have any promising developments in the works? I own shares and I'm not sure if I should hold onto them or not. B.G., via the Internet.
A. It's been a rough road for most blue chip stocks
in 2002.
Stock of the nation's
No. 3 drug-maker has hit plenty of bumps as poor market conditions
led to the company repeatedly pulling back the $1 billion spin-off
its pharmacy benefit provider MedcoHealth Solutions.
Shares of Merck are
down 16 percent this year, following last year's 36 percent decline.
Negative accounting news was another pothole.
Analysts criticized
Medco's booking of $12.4 billion in patient co-payments to pharmacists
as revenue. Although this didn't affect the firm's bottom line,
they contended this was inappropriate and would have a bearing
on the sale price. Merck management says the Securities and Exchange
Commission has now given its approval to its handling of that
accounting.
Profits derived from
the Medco sale would help fund the company's recently announced
$10 billion stock buy-back program.
Merck's earnings have
been nothing to write home about, coming in flat in its most
recent quarter. Management expects them to remain flat the remainder
of the year. The loss of patent protection for a number of drugs
such as hypertension treatment Vasotec and ulcer treatment Pepcid
have taken their toll.
Sales are strong for
osteoporosis drug Fosamax, high-cholesterol drug Zocor and arthritis
drug Vioxx, despite fears that Vioxx raises the risk of heart
attacks and insurers are unwilling to pay for the painkiller.
High blood pressure medications Cozaar and Hyzaar are also selling
well. In a four-year trial, the family of drugs to which Cozaar
belongs outperformed atenolol, a widely used beta blocker.
Yet with so many question
marks and the company calling this a "transition year,"
there's a range of stock opinion.
The consensus on Merck
shares from analysts who track them is currently a "hold,"
according to the Boston-based First Call research firm. That
consists of two "strong buys," three "buys,"
17 "holds," two "sells" and one "strong
sell."
Merck earnings are
projected to decline less than 1 percent this year, versus a
2 percent gain for the pharmaceuticals industry. Next year's
expected 8 percent gain compares to 15 percent for its peers.
Merck's five-year forecast is for a 10 percent annualized earnings
gain, as opposed to 13 percent expected industry-wide.
Vanguard Wellesley Income Fund for Income and Growth
Q. For retirees like me, who need some current income along with some potential for growth, funds with about 60 percent bonds and 40 percent stocks, such as Vanguard Wellesley Income Fund, are frequently recommended. What's your opinion of this fund? C.S., Schaumburg, IL.
A. This
solid, conservative fund meets your criteria.
It has done especially
well over the last two-and-a-half years as dividend-paying stocks
and intermediate bonds prospered. It has no technology stock
holdings, thereby significantly reducing volatility.
The $7 billion Vanguard
Wellesley Income Fund (VWINX) had a 12-month return of 3 percent
and a three-year annualized return of 8 percent. Both returns
rank in the top 4 percent of all "balanced" (stock
and bond) funds.
It currently has 62
percent of its portfolio in bonds, 37 percent in stocks and the
rest in cash. Earl McEvoy, who runs the bond side for it and
other Vanguard funds, and John Ryan, who selects stocks using
a careful value strategy, are veteran managers who definitely
know what they're doing.
"Wellesley's risk
is low and it has a good track record, but you must accept the
fact that in a bull market it will lag because it doesn't emphasize
growth stocks," said Daniel Wiener, editor of The Independent
Advisor for Vanguard Investors (www.adviseronline.com), 7811
Montrose Road, Potomac, MD. 20854. "It is also best for
someone in a low income-tax bracket because it is generating
a lot of taxable income."
Within its bond portfolio,
41 percent of holdings are rated "A." Its stock portfolio's
largest categories are financials and industrials, with other
significant holdings in energy and utilities. The top stock holdings
were recently ExxonMobil, Weyerhaeuser, SBC Communications, Verizon
Communications, DuPont, BellSouth, National City, XL Capital
Class "A", Kimberly-Clark and FNMA.
This "no-land"
(no sales charge) fund requires a $3,000 minimum initial investment.
While Vanguard Group is best known for index funds, this and
other actively managed funds prove that it can excel in this
area as well.
Build A Solid Foundation
Q. I am 63 years old and making the maximum contribution to my company's 401(k) plan. Watching the total value of my account decline over the past two years, I feel as if continued contributions will be counterproductive. What alternatives do I have? S.H., via the Internet
A. The
problem is not with the 401(K) vehicle itself, but what you've
invested in.
It would be difficult
to come up with a more attractive package than this retirement
plan that includes tax benefits, automatic payroll deduction,
incentives to keep the money where it is and, in many cases,
matching contributions from your employer.
You must make certain,
however, that a big chunk of your 401(k) money is placed in investments
that won't tumble in value.
"At age 63, a
significant portion of what you're investing in should be fairly
stable, such as guaranteed income funds or short- and intermediate-term
bond funds," advised Marilyn Capelli Dimitroff, certified
financial planner and president of Capelli Financial Services
Inc. in Bloomfield Hills, MI. "For the portion that you
do put into stocks, you should gradually accumulate now while
they're the least risky because their price is depressed."
Reexamine your risk
tolerance, build a solid foundation and only branch into riskier
areas when basic core investments are doing well. Stick with
your 401(k) program.
Bond Fund of America: Credit Sensitive
Q. I am in my late 40s and have $60,000 to invest. I'm looking to outperform certificate of deposit rates. My advisor recommends putting some of this money into Bond Fund of America. Does this fund make sense? S.L., via the Internet.
A. It has suffered the fallout from the accounting
scandals and telecommunications implosion that have sent low
quality bonds into a swoon.
This flagship bond
fund successfully took on credit risk in the early 1990s before
stormy weather damaged its returns. Potential investors should
realize it could suffer in an economic downturn because 20 percent
of portfolio is in volatile high-yield bonds.
The $12 billion Bond
Fund of America "A" (ABNDX) declined a half-percent
over the past 12 months and has a three-year annualized return
of 4.79 percent and a five-year annualized return of 4.59 percent.
All three rank in the lowest 10 percent of intermediate bond
funds.
"Among bond funds
that could be core holdings, this falls on the more aggressive
side because of its credit sensitivity," cautioned Eric
Jacobson, senior analyst for the Morningstar Inc. research firm
(www.morningstar.com) in Chicago. "But while it's not a
`straight' core bond fund, it's not a junk bond fund either."
Jacobson wouldn't be
surprised if this fund run by a team of portfolio managers becomes
more cautious in light of recent declines. Yet a big selling
point is the fact its advisor, Capital Research & Management,
devotes significant effort to research.
"Bond Fund of
America is designed for an investor looking for a core bond fund
but needing more income and therefore willing to dip down in
quality," Jacobson said. "I would probably pair it
up with a higher quality fund, since it's too risky to be your
only core fund."
Bond Fund of America's
average bond credit quality is "A" and average duration
of its bonds is four-and-a-quarter years. Among its three largest
bond categories, 21 percent are rated "A", 19 percent
are "BBB" and 18 percent are government bonds. It also
has 9 percent of its portfolio in cash. This 3.75 percent "load"
(sales charge) fund requires a $250 minimum initial investment.
Choosing A Discount Broker
Q. I'm trying to choose a discount broker. What criteria should I use to compare them? D.H., Chicago, IL
A. Discount
brokers offer trades at considerably lower cost than full-service
brokers because they offer no advice on investments. However,
most do make available research materials on stocks.
They average about
$16 a trade, though some charge less than $10 and others over
$20.
Finding the least expensive
discount broker isn't easy, for charges vary with the transaction
and each discounter's scale is slightly different. Be sure to
get a price based on the specific buying or selling that you
wish to do.
Your selection among
discount brokers depends on whether you're looking for financial
planning tools and research or just a cheapo broker who gives
you $6 trades," explained Shalin Patel, analyst with Gomez
Advisors (www.gomez.com) in Waltham, MA., which ranks the discount
brokers on its Web site. "Look at whether the firm hits
you with quarterly inactivity fees or other hidden costs for
having a relationship with it."
The least expensive
discounters as ranked by Gomez are: (1) Financial Café,
(2) Empire, (3) Scottrade, (4) Firstrade and (5) Datek.
But adding in ease
of use, resources and consumer confidence, Gomez ranks the following
the best: (1) Charles Schwab, (2) Fidelity Investments, (3) E*TRADE,
(4) Harrisdirect and (5) Ameritrade.
Editor's Note:
Andrew Leckey answers questions for Bull & Bear online readers
only through the 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
