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Boost Chipmaker's Prospects
Q. I'm 28 years old with a fairly aggressive investment
portfolio. I bought shares of Qualcomm Inc. in 1999. What's the
outlook for this stock? J.B., via
the Internet
A. The
world's largest chipmaker for mobile telephones has reason for
optimism.
Profits in its most
recent quarter rose 64 percent before one-time items and it boasts
a solid balance sheet with $2 billion in cash and no debt. The
company boosted its earnings forecast for the current quarter
and expects to ship as many as 27 million chips, the majority
for Internet-enabled phones.
Unfortunately, Qualcomm
has also built a reputation for overdoing "pro forma"
accounting in its financial reporting, making its results seem
overly sunny, a practice that has reduced some of its credibility
with Wall Street.
The firm has actually
been outperforming other wireless equipment companies on the
strength of its technology. It pioneered and has hundreds of
patents for code division multiple access (CDMA) technology,
a digital platform used in cell phones, telecommunications equipment
and satellite base stations.
Growth prospects are
fueled by its expanding international business. China began offering
wireless service based on Qualcomm technology this year, while
India is expected to start service based on that same technology
next year. The company is also in talks to bring its next-generation
systems to Hong Kong and Taiwan.
Nonetheless, the wireless
industry is faltering. Next-generation wireless handsets have
yet to post significant sales, and there's a backlog of inventory
at carriers. Qualcomm faces a number of rivals and the possibility
that some new innovations might turn out to be busts.
As a result, shares
of Qualcomm (QCOM) are down 24 percent this year, following a
decline of 39 percent last year and a 53 percent drop in 2000.
If you need to be reminded why you invested in the company's
stock in the first place, however, think back to 1999 when its
shares rose an astronomical 2,619 percent.
The consensus recommendation
on Qualcomm shares is currently between a "buy" and
a "hold," according to the Boston-based First Call
research firm. That consists of six "strong buys,"
nine "buys," 11 "holds" and two "sells."
The company's earnings
are expected to increase 14.5 percent this year and 6 percent
next year. It's projected five-year annualized return of 21 percent
compares to a predicted 16 percent for the communications technology
industry.
Fidelity Blue Chip Growth Fund: A Solid Bet For The Long-term
Q. What's your opinion of Fidelity Blue Chip Growth
Fund? I invested in this fund through my 401(k) retirement plan.
I'm 59 and plan to retire at age 64.
H.W., Worcester, MA.
A. This giant fund is fully committed to large growth
stocks. It took its lumps as they stumbled and disappointed investors
who'd lost money redeemed their shares.
The $17 billion Fidelity
Blue Chip Growth Fund (FBGRX) declined 22 percent in value over
the past 12 months, placing it in the upper half of all large
growth stock funds. Its three-year annualized decline of 15 percent
put it in the upper one-third of its peers.
"It isn't on my
`buy' list because I prefer growth funds with a smaller asset
base that will attract new money and not have to deal with redemption
hangover," explained Jack Bowers, editor of the Fidelity
Monitor newsletter. "But it's still a solid bet for
the long term because in `up' markets it is consistently ahead
of the Standard & Poor's 500."
In Bowers' opinion,
growth stocks are finally picking up their pace again and there's
a good chance Fidelity Blue Chip Growth will be outperforming
the S&P 500 on the way back up. Unfortunately, too many people
get out of a fund at the worst time-the lowest point-because
they feel they made a mistake. That logic will continue to drain
money away from this fund for some time, Bowers expects.
Portfolio manager John
McDowell, in charge since 1996, doesn't take big chances on any
one stock. He prefers companies with good short- and long-term
earnings growth prospects, but won't pay a premium price unless
growth rates are dramatic. The fund's annual expenses are below
average at 0.74 percent.
Fidelity Blue Chip
Growth Fund has nearly one-fourth of its portfolio in health
care stocks. Other significant groups include financial services,
consumer goods and hardware. Its largest holdings were recently
Microsoft, General Electric, Pfizer, Intel, Wal-Mart Stores,
American International Group, Coca-Cola, Johnson & Johnson,
Philip Morris and Citigroup.
This "no-load"
(no sales charge) fund requires a $2,500 minimum initial investment.
Profits Perking Up For Starbucks
Q. I've watched Starbucks coffee stores pop up all
over the place. It looks like its stock has performed pretty
well. What's the outlook? M.T.,
via the Internet
A. Starbucks Corp. shareholders don't need caffeine
to get a buzz: New products and a popular prepaid card program
are perking up profits at the world's largest specialty coffee
retailer.
Profits rose 10 percent
in its most recent quarter, matching forecasts, while sales at
existing stores remain strong. The company projects earnings
will grow at a 20 to 25 percent annual clip over the next five
years.
With 5,980 stores worldwide,
Starbucks has recently been opening outlets in less traditional
locations and experimenting with new features.
For example, Staples
Inc. stores are testing Starbucks during the holiday season and
there are also 300 Starbucks drive-through stores. Additional
expansion plans include fine restaurants, resorts, campuses,
health-care facilities and offices.
About 1,700 Starbucks
stores have been equipped to handle wireless access to the Internet,
for which customers pay a fee to browse while sipping their brew.
The company is also testing an express service in which each
customer account has a personalized order with prepayment.
Management expects
10,000 Starbucks stores in 60 countries by the end of 2005, with
a longer-term goal of 25,000.
Shares of Starbucks
(SBUX) are up 15 percent this year, rebounding from last year's
14 percent decline. They rose 83 percent in 2000. Chairman Howard
Schultz, who focuses on international expansion, bought the chain
in 1987 when it had six stores. Chief executive Orin Smith handles
U.S. operations.
Problems in the global
green-bean market have driven prices to historic lows and put
coffee growers into dire straits, but Starbucks maintains that
it has a 20-month supply of beans.
Profits from sandwiches
and other food has been disappointing, though it is now testing
four breakfast sandwiches in Seattle area stores.
Rapid overseas expansion
carries risk. Starbucks Coffee Japan Ltd., 40 percent owned by
Starbucks Corp., expects a loss of $4.1 million for its current
fiscal year and is cutting back store openings.
Consensus on the company's
stock from analysts who track it is between a "buy"
and a "hold," according to the Boston-based First Call
research firm. That consists of four "strong buys,"
three "buys" and 10 "holds."
Starbucks earnings
are expected to increase 15 percent this year, versus 11 percent
forecast for the restaurant industry, according to First Call.
Next year's estimated 18 percent rise compares to 10 percent
predicted for its peers. The firm's five-year annualized growth
rate projection of 22 percent is more robust than the 13 percent
likely industry-wide.
Switch To A 529 Plan
Q. I have Uniform Transfers to Minors Act (UTMA) accounts
set up for my 13 year old and 15 year old. I'm not happy with
their performance and am considering 529 college savings plans.
With only a few years to go before college, does it make sense
to pursue that option? R.D., Lombard,
IL.
A. That move isn't uncommon.
If your current investments
have gone down in value, it might make sense to take a capital
loss and put the money into a 529 plan, said Joseph Hurley, CPA
and chief executive of Savingforcollege.com in Pittsford, N.Y.
The 529 plans are the
only college savings program completely sheltered from federal
taxes with no income restrictions. In addition, some parents
move money from an UTMA to a 529 plan because they're nervous
that their children won't spend the money for college.
"With older children
nearing college, you're likely to be moving your money into more
conservative vehicles, such as fixed-income and interest-bearing
accounts," Hurley noted, "and the tax shelter of the
529 plan is its most powerful with these less tax-efficient investments."
Most 529 plans have
restrictions for money coming in from an existing custodial account,
such as an UTMA, explained Hurley. For example, you aren't allowed
to change beneficiary and any money taken from the 529 account
must be used for the benefit of that beneficiary.
Reduce Holdings of PGRWX If Approaching Retirement
Q. I've had shares of Putnam Fund for Growth &
Income since 1995. Are they worth keeping? I'm 60 and hope to
retire in five years. J.S., Schaumburg,
IL.
A.
Its decline in value over the past year is painful for someone
with retirement near on the horizon. Hopefully, you have holdings
in fixed-rate instruments to balance it out.
The $14 billion Putnam
Fund for Growth & Income "A" (PGRWX) declined 20
percent over the past 12 months and had a three-year annualized
decline of 8 percent. Both results rank in the lower half of
large value funds.
"For someone so
close to retirement, I'd suggest that this fund play a somewhat
smaller role in your portfolio," said Laura Pavlenko Lutton,
analyst with the Morningstar Inc. research firm. "Nonetheless,
it is an all-weather large value fund that benefits from Putnam's
fine research, with 238 stocks so you get a nice sampling of
value stocks."
It's a "no-nonsense,
no-surprises" core portfolio holding for a conservative
investor and "hugs the middle" of that category in
performance, she said. Don't invest in it if you expect a "blow-out"
year because you won't get it, even though you won't have to
worry about it trailing its peers in other years.
An experienced value
management team consisting of Hugh Mullin, David King and Christopher
Miller is dedicated to finding undervalued large-cap stocks that
look cheap based on future prospects. Each team member runs one-third
of the portfolio.
Twenty-seven percent
of the fund's assets are currently in financial services stocks.
Other significant groups include health care, consumer goods,
industrial materials and energy. Its top stock holdings were
recently Citigroup, ExxonMobil, Pfizer, Merck, General Electric,
Philip Morris, Bank of America, Royal Dutch Petroleum, Coca-Cola
and Fannie Mae.
Putnam Fund for Growth
& Income "A" requires a 5.75 percent "load"
(sales charge) and a minimum initial investment of $500. Its
annual expense ratio of .82 percent is below the group average
of 1.16 percent.
Choosing Between Load And No-Load Funds
Q. I'm trying to choose between load and no-load
funds. How many of each is there?
R.O., via the Internet
A. Many
do-it-yourself investors burned by the stock market decline have
apparently been edging away from "no-load" (no sales
charge) mutual funds. These are sold directly by a mutual fund
company using no salesperson, with a toll-free number usually
the sales vehicle.
Twenty-three percent
of funds do not have loads, and that portion has been in decline
since the late 1990s, according to Lipper Analytical Services.
The remainder of funds do require loads, which are commissions
paid to a salesperson, financial planner or broker.
"People pay loads
if they feel they need help, since a load is strictly a sales
charge to get in and offers no performance advantage," noted
Don Cassidy, senior research analyst with Lipper in Denver. "People
seem to be saying, `I'm not as smart as I thought I was and need
to go to a broker or planner.'"
On the other hand,
many investors who did have brokers or planners were burned by
the downturn, so be sure that you'll receive advice from the
expert that you can count on. Also make a point to examine any
fund's annual expense ratio, which includes all of its fees.
Editor's Note: Andrew Leckey answers questions for Bull & Bear 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.
