ALSO - Variable Annuities Rebounding
GlaxoSmithKline Shares Up
Q. I'm interested in investing in pharmaceuticals.
What's your opinion of GlaxoSmithKline? - K.M, via the Internet
A. This London-based drug company's shareholders
recently voted to reject a $35 million "golden parachute"
proposal for Chief Executive J.P. Garnier that would have been
triggered if he lost his job under certain conditions.
This marked the first
time British investors made a decision on extravagant pay. Europe's
biggest drugmaker says it will honor the vote results and re-evaluate
its remuneration program.
A shakeup of its board
is also expected. Just last November, the board had pushed unsuccessfully
for a $29 million benefits package for Garnier to bring him in
line with U.S. peers.
GlaxoSmithKline (GSK)
shares are up 14 percent this year, following last year's 23
percent decline. All drug stocks were hurt recently when the
Supreme Court set aside a preliminary injunction that had prevented
Maine from initiating a program to lower prescription drug costs
for uninsured residents who don't qualify for Medicaid.
The company generates
$30 million in annual revenue from more than 1,000 products sold
in 140 countries. While its diversity is a positive, this enormous
size makes rapid growth difficult. Its near-term new product
pipeline isn't that strong, since most of these drugs won't be
on the market until 2005.
Sales of Augmentin,
the popular antibiotic facing generic competition, have dropped
in half. Antidepressant Paxil lost a patent case, and generics
could be on the market by late this year. Zofran, which treats
nausea associated with some types of cancer, also faces generic
challenges.
But Advair, the only
asthma medication for treating both inflammation and bronchoconstriction,
has had dramatic sales. Diabetes treatment Avandia and heart
drug Coreg are also doing well. Levitra, an impotence drug Glaxo
will co-market with Germany's Bayer AG, could eventually produce
$1 billion in annual sales and rival the success of Viagra. The
firm also makes consumer products such as Aquafresh and Nicorette.
The consensus rating
on GlaxoSmithKline stock is currently a "hold," according
to the Boston-based First Call research firm. That consists of
one "strong buy," one "buy," four "holds"
and two "sells."
Earnings are expected
to increase 11 percent this year, or 1 percent better than the
forecast for the pharmaceuticals industry. Next year's projected
0.8 percent rise compares to the 15 percent forecast industry-wide.
A five-year annualized earnings increase of 10 percent is forecast
for the company, compared to 12 percent for its peers.
In a final note, be
aware that the Internal Revenue Service is challenging Glaxo's
tax filings from 1989 to 1999, which could require payment of
back taxes and penalties.
Fidelity Small Cap Stock Fund: Capable Portfolio Manager
Q. I own five mutual funds, including Fidelity Small
Cap Stock. What's your opinion of this fund? - J.A., via the Internet
A. If you're looking for a diversified
small-cap stock fund with a capable portfolio manager who won't
take big risks, this could be it.
The $1.4 billion Fidelity
Small Cap Stock Fund (FSLCX) has declined 16 percent over the
past 12 months, yet it ranks in the top one-fourth of small company
growth funds. Its three-year annualized decline of 1 percent
places it in the upper 15 percent of its peers.
"I don't believe
portfolio manager Paul Antico has lost in either bull or bear
markets to the Russell 2000, which is an accurate benchmark for
his fund," observed Jim Lowell, editor of the independent
Fidelity Investor newsletter (www.fidelityinvestor.com), 7811
Montrose Rd., Potomac, MD 20854. "You do need to know that
there's a short-term redemption fee on the fund of 2 percent
if you hold the shares less than 90 days, but you'd be unlikely
to do that."
In charge since the
fund's inception in early 1998, Antico has built offensive and
defensive characteristics into it. He finds companies with strong
growth potential, but won't pay exorbitant prices. He diversifies
among 200 stock names to reduce risk and especially likes turnaround
plays. Fidelity analysts provide solid research support.
One concern about Fidelity
Small Cap Stock, however, is that this portfolio might lose out
in a small-cap rally if technology stocks continue to dominate.
It also becomes more difficult to keep performance strong with
such a large asset base.
Among the largest stock
groups in Fidelity Small Cap Stock, industrial materials currently
represent 21 percent, health care 17 percent, consumer services
16 percent and business services 15 percent. Top holdings were
recently Owens-Illinois, Ingram Micro Class A, Petsmart, Tech
Data, Alexandria Real Estate Equities, Covance, Coinstar, American
Healthcorp, Crown Castle International and Priority Healthcare
Class B.
This "no-load"
(no sales charge) fund requires a $2,500 minimum initial investment
and has a modest annual expense ratio of 1.07 percent.
Toyota and Honda Face A Bumpy Road
Q. I own shares of stock in Japanese carmakers
Toyota Motor Corp. and Honda Motor Co. What's the outlook for
these companies? -
T.A., via the Internet
A. Both of these respected Japanese carmakers
posted record profits in the past fiscal year thanks to solid
sales gains and relentless cost-cutting measures.
Toyota's profits jumped
53 percent, while Honda's rose 18 percent.
Yet despite stronger
results, both carmakers see a bumpy road ahead because of the
troubled U.S. and Japanese economies and the impact on the global
business environment. Since they do so much overseas business,
they also face foreign currency risks.
Shareholders are wary.
Shares of Honda (HMC) are down 3 percent this year following
an 11 percent decline last year. Shares of Toyota are down 11
percent in the wake of last year's 5 percent gain.
Honda, Japan's second-largest
carmaker, makes products ranging from small general-purpose engines
to specialty sports cars that incorporate its highly efficient
internal combustion engine technology. Best known for motorcycles
and its Honda and Acura car lines, the company has 437 subsidiaries
and affiliates.
Research chief Takeo
Fukui was recently named Honda's new president and chief executive
officer. The firm has announced plans to enter the small airplane
piston-engine business in partnership with Alabama-based Teledyne
Continental Motors. It begins selling cars in South Korea later
this year, following Toyota's lead.
As Japan's biggest
carmaker, Toyota has 564 subsidiaries and 239 affiliates that
include financial services and other businesses. It is a strong
competitor in more than 160 countries, surpassing all other carmakers
in outreach. Its popular brands include Toyota, Lexus and Daihatsu.
It is launching a remodeled version of its gas-and-electric-powered
hybrid Prius subcompact this year.
Near-term prospects
seem slightly brighter for Honda than Toyota.
Honda receives a consensus
"buy" recommendation from Wall Street analysts based
on one "strong buy," one "buy" and one "sell,"
according to the Boston-based First Call research firm. Meanwhile,
Toyota is closer to a "hold," based on one "buy"
and two "holds."
Honda earnings are
expected to increase 16 percent this year, while Toyota earnings
will likely be flat, according to First Call. The forecast for
the automotive industry is for a 17 percent drop in profits.
Both car companies
are expected to experience earnings declines next year, with
Honda down 7 percent and Toyota down 4 percent. The industry-wide
projection is for a 20 percent rise. Honda's expected five-year
annualized growth rate is pegged at 13 percent, while Honda's
is 9 percent. Both forecasts beat the expectation of 5 percent
for their peers.
Advantages and Disadvantages Of I Bonds
Q. What are the advantages and disadvantages of
I Bonds? I'm 80 years old.
- W.T., Des Plaines, IL.
A. Popular because of its attractive
rate, the I Bond is a U.S. savings bond sold at face value that
earns interest for 30 years, though you can sell after five years
with no penalties.
The current interest
rate of 4.66 percent is made up of a fixed rate (1.1 percent)
and an inflation-adjusted rate (3.56 percent) that is adjusted
semiannually. Rates are published every May 1 and November 1.
The investment compounds
tax-deferred until the bond is cashed in. If you cash in after
year one but before the end of year five, you forfeit three months
of interest.
"I wouldn't be
alarmed by the three-month penalty, since people are investing
in I bonds now because their initial rate is almost five times
higher than a money-market fund," explained Daniel Pederson,
president of Savings Bond Informer (www.bondhelp.com), a fee-based
service in Detroit that provides savings bond owners with statements
and written analysis. "Even if investors cashed in after
a year and paid the penalty, they'd wind up with a rate three
times that of a money-market fund."
Relatively New Artisan Mid Cap Value Fund Has Held Up Well
Q. I'm a moderately aggressive investor interested
in Artisan Mid Cap Value Fund. What's your opinion of this fund? - P.L., via the Internet
A. It's only been around a couple of
years and its annual expense ratio of 1.95 percent is a bit on
the high side.
Nonetheless, the fund
has a modest $1,000 investment minimum, a team of experienced
portfolio managers and held up well in a difficult stock market
environment.
The $20 million Artisan
Mid Cap Value Fund (ARTQX), initiated in March 2001, declined
4 percent in value over the past 12 months to rank in the top
10 percent of all mid-cap value funds.
"We recommend
this fund in our model portfolios and have been pleased with
it," said Sheldon Jacobs, editor of The No-Load Fund
Investor (www.sheldonjacobs.com), P.O. Box 318, One Bridge
St., Irvington-on-Hudson, N.Y. "Some of the best funds are
new funds such as this one and I also like Artisan funds because
they've developed a solid organization there."
However, Jacobs also
noted that he's been shifting his own recommended portfolios
toward growth rather than value lately because he sees signs
that the bull market will be returning.
Over the past three
years, he had suggested 60 percent value stocks and 40 percent
growth stocks. That's now been reversed to 60 percent growth
and 40 percent value as he sees the market undergoing a shift.
Artisan Mid Cap Value
portfolio managers James Kieffer and Scott Satterwhite, who have
also managed Artisan Small Cap Value (ARTVX), emphasize 40 to
60 cash-producing companies that are low-priced in light of their
strong financial positions. They prefer to buy distressed companies,
rarely invest in firms with market capitalization less than $500
million and do not trade often.
Nearly one-third of
the fund's portfolio is in financial services, while other significant
segments are energy, consumer goods and industrial materials.
Its largest stock holdings
are Apache, Countrywide Financial, Student Loan, White Mountains
Insurance Group, Furniture Brands International, Polo Ralph Lauren,
Cross Timbers Oil, Republic Services Class "A", Nuveen
Investment and Zale. It is a "no-load" (no sales charge)
fund.
Merrill Lynch Transfusion: Fixed-Income Operations
Q. What's the outlook for Merrill Lynch & Co.?
I'm trying to decide whether or not to dump the stock from my
portfolio. - T.G.,
via the Internet
A. Thank heavens for the bond market.
Strong fixed-income
operations have been a big boost to the No. 1 brokerage firm
as it navigates its way through an extended slump in stocks.
Earnings rose 6 percent in its past quarter as bond trading,
derivatives transactions and significant cost cutting offset
the lower fees received from its merger advisory and underwriting.
Merrill's brokerage
commission revenue was down 14 percent for the quarter. Overall
U.S. equity volume among all brokers just finished its worst
April in five years, according to market research firm Dealogic.
Under new chief executive
officer E. Stanley O'Neal, Merrill is placing profitability above
the desire to be largest in every business in which it is involved.
It has eliminated 1,300 jobs in recent months to bring its total
employees to 49,600 people. The company also recently restructured
its global securities research and economics division.
Shares of Merrill Lynch
(MER) are up 9 percent this year, following declines of 26 percent
last year and 23 percent in 2001.
Of course, its legal
issues have provided the most publicity.
Merrill last year agreed
to pay $200 million in a settlement related to an investigation
by New York State Attorney General Eliot Spitzer as to whether
investors were mislead by Wall Street analysts offering rosy
reports on companies for which the firms received investment
banking business. More recently, Merrill agreed to pay $80 million
to settle with the Securities and Exchange Commission over its
dealings with Enron Corp.
While those settlements
were positive, there is the possibility of additional litigation
from states and investors. The company has set money aside to
meet potential legal costs.
It continues to place
greater emphasis on fee-based asset management, though its revenues
are still dominated by the volatile trading and investment banking
businesses.
The consensus on Merrill
Lynch stock from the analysts who track it is midway between
a "buy" and "hold," according to the Boston-based
First Call research firm. That consists of three "strong
buys," five "buys" and nine "holds."
Merrill's earnings
are expected to grow 8 percent this year, compared to the 17
percent gain forecast for the diversified financial industry.
Next year's projection is for a 12 percent earnings increase,
versus 11 percent industry-wide.
Its five-year annualized
return is pegged at 12 percent, which is 1 percent less than
that expected of its peers.
American Balanced Fund: Difficult To Go Wrong Here
Q. I am a novice investor with a Roth Individual
Retirement Account. I'm considering a balanced fund, but have
only $1,000 to invest in it. What's your opinion of American
Balanced Fund for someone like me? - J.U., Sioux City, Iowa
A. It might be a good place to start.
As a balanced fund
designed for conservative investors, it includes stocks, bonds
and some cash. There's a modest minimum initial investment of
$250 and a low annual expense ratio of 0.69 percent.
Its American Funds
family is known for large-asset funds that benefit from an army
of experienced portfolio managers and analysts. The fund's stock
portion consists mostly of blue-chip stocks that it buys at reasonable
prices and holds for the long term.
Despite these positive
attributes, however, the fund declined over the past difficult
year for the market, though not as much as many others did. Its
stocks are broadly diversified, but its AOL Time Warner stock
was a drag on the portfolio.
The $12 billion American
Balanced Fund "A" (ABALX) has declined about 5 percent
over the past 12 months, to rank near the top one-third of balanced
funds. Its three-year annualized return of 6.5 percent places
it in the top 5 percent of its peers.
"American Balanced
could serve as the largest holding in your retirement portfolio,
since over the past 10 years it's up 10 percent per year, which
is way ahead of the Standard & Poor's 500," said Paul
Herbert, fund analyst with the Morningstar Inc. research firm.
"It would be difficult to go wrong investing here."
Five portfolio managers
independently select securities. The fund has 63 percent of its
portfolio in stocks, 32 percent in bonds and the rest in cash.
The average credit quality of its bonds is AA with an average
duration of 4.29 years.
Among its diversified
stock holdings are concentrations in financial services, industrial
materials, consumer services and health care. Its top stock holdings
were recently General Electric, J.P. Morgan Chase & Co.,
Eli Lilly, General Motors, Target, ConocoPhillips, Bristol-Myers
Squibb, AOL Time Warner and IBM.
American Balanced "A"
requires a 5.75 percent "load" (initial sales charge).
What Are ADRs?
Q. Can you tell me what ADRs are, and where I can
buy them? - B.C., via
the Internet
A. An
American Depositary Receipt, or ADR, represents equity ownership
in a non-U.S. security. It "Americanizes" the shares
to make them easier and more cost-efficient for U.S. investors
to own. The first ADR was created in 1927.
ADRs are quoted in
dollars, their dividends are paid in dollars, and they trade
like any U.S. security. Rather than having to ask your broker
to execute your order in a foreign country, change the currency
and overcome obstacles inherent in an international transaction,
ADRs let you do it simply.
"You buy an ADR
through a broker, as you would a U.S. stock," explained
Vincent Fitzpatrick, managing partner with the Bank of New York,
which performs the depositary role required in the structuring
of an ADR. "You diversify your portfolio and get the exposure
you need while staying in the U.S."
ADRs are easy to find,
since there are about 1,400 of them, with more than 500 listed
on national exchanges such as the New York Stock Exchange, American
Stock Exchange and the Nasdaq Stock Market. The rest are so-called
"pink sheet" stocks sold over the counter.
Mutual Fund Rankings
Q. What does a mutual fund's "ranking"
indicate? I'm referring to when an article says a fund is said
to be in the top 10 percent or bottom quartile. What does that
mean? - A.D., via the
Internet
A. Mutual fund listings in the newspaper
show their total returns, indicating whether the value of your
investment has gone up or down.
However, rankings by
different categories as defined by market capitalization and
investment style are another closely followed measure. This would
include, for example, large-capitalization growth stocks and
small-capitalization value stocks.
As a result, a fund
may have declined over the past year, but still rank highly within
its category because that overall category of funds performed
poorly. It's a way of determining whether your fund is a solid
long-term performer within its peer group.
"The basic reason
for this is the goal of intelligent diversification of your stock
and bond exposure among different categories," explained
Andrew Clark, senior research analyst with Lipper Analytical
Services in Denver. "Always be looking at whether a fund
has consistently held its ranking within its category over a
quarter, a year or several years, and not merely for one month."
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.
