ALSO - Consumer Spending Patterns Remain Tough To Predict
Q. I think oil companies look interesting these days,
particularly BP PLC. Is its stock worth investing in? - J.K., via the Internet
A. The world's fourth-largest public company and
second-largest oil company is proving that bigger can be better.
London-based BP, once
known as British Petroleum, grew dramatically with its 1998 purchase
of Amoco Oil. Only Exxon Mobil is bigger in sales. BP is in a
virtual tie with Royal Dutch-Shell for second place.
After it kicked off
the oil industry merger craze, BP continued to grow through acquisitions.
For example, it recently paid $2.6 billion in cash for its stake
in a newly formed joint venture company called TNK-BP in the
Russian and Ukrainian oil and gas businesses.
This aggressive attitude
pays off: BP profits rose 42 percent in its most recent quarter,
thanks to higher energy prices and improved refining margins.
Supply problems and strong demand for gasoline together pushed
refinery margins to near-record levels.
Shares of BP (BP) are
up 8 percent this year, following last year's 10 percent decline.
The company's stock trades on the New York Stock Exchange as
an American Depositary Receipt.
Exploration success
is a key ingredient in any oil company's success. BP recently
announcing a new oil discovery in the central North Sea near
Aberdeen, Scotland. The company now has proven reserves of 16
billion oil-equivalent barrels and produces 3.5 million barrels
a day. It can also refine more than 3 million barrels daily and
sells petroleum through its 29,000 service stations around the
world.
Yet oil remains a complex
business. The future of any company is tied to the effectiveness
of OPEC in controlling supply and setting prices. Each firm must
also deal with vagaries of governments in countries around the
world where it drills and sells its products. Environmental issues
also play a significant role.
The consensus rating on the stock of BP is currently a "buy,"
according to the Boston-based First Call research firm. That
consists of seven "strong buys," five "buys,"
six "holds" and one "sell."
Earnings are expected
to increase 31 percent this year, versus the 48 percent predicted
for the integrated oil and gas industry. Next year's projected
14 percent decline compares to the 18 percent drop expected industry-wide.
The five-year annualized
return for BP is forecast at 6 percent, versus 7 percent for
its peers.
BP produces and markets crude oil and petroleum products worldwide.
It is involved in exploration and field development, as well
as manufacturing and selling petroleum-based chemical products.
Q. I've been following the stock of Home Depot Inc.
and Lowe's Cos. Inc. What's the outlook for these two companies?
- S.P., via the Internet
A. Many Americans are investing their hard-earned
money in home improvement projects these days, thanks to record
mortgage refinancings and spirited consumer spending.
In the battle of the
two home improvement giants, one company is performing quite
well and the other is turning in dramatic results. No. 1 Home
Depot's earnings increased 10 percent in its most recent quarter,
while No. 2 Lowe's earnings jumped 28 percent.
Home Depot, a brilliant
success story of the 1990s now dealing with a slowing growth
rate and deteriorating stores, has more than 1,500 stores in
the United States, Canada and Mexico.
It has had to spruce
up existing outlets and improve customer service that had suffered
from having a workforce with many part-time employees. A store
renovation program is under way, though it's too soon to tell
how successful it will be. Home Depot is also opening its first
store in Manhattan.
Former General Electric
executive Robert Nardelli is Home Depot chairman and chief executive
officer. On board since late 2000, Nardelli understands he must
boost growth and solve store problems as soon as possible.
Lowe's, an aggressive
but smaller rival, has about 875 U.S. stores in 44 states, primarily
in the eastern and midwestern U.S. Now invading the large urban
and suburban areas that Home Depot had to itself, it's also snatching
market share from smaller rivals.
Chairman and CEO Robert
Tillman, who has run Lowe's since 1996, benefits from a management
team that's rated one of the best in retailing. It is spending
a lot of cash on new stores, which isn't a problem so long as
profits remain robust.
Each retailer is seeking
to woo the building contractor business.
Both of these stocks
receive consensus "buy" ratings from the Wall Street
analysts who track them, with Lowe's rating slightly higher than
Home Depot, according to the Boston-based First Call research
firm.
Lowe's receives nine "strong buys," seven "buys"
and eight "holds," while Home Depot merits 10 "strong
buys," five "buys" and 10 "holds."
Lowe's wins the earnings
projection game. Its profits are expected to increase 19 percent
this year, versus the 11 percent gain forecast for Home Depot.
Next year's expected 13 percent increase for Lowe's compares
to 11 percent for Home Depot.
Looking further ahead,
Lowe's projected five-year annualized growth rate is 20 percent,
versus 13 percent predicted for Home Depot and 16 percent for
the industry.
Q. I'm thinking about selling my stock in General
Motors Corp. What are its long-term prospects? - L.M., via the Internet
A. The
world's largest carmaker is trying to get back into gear.
Stalled by expensive
cash-back rebates and other incentives aimed at North American
customers, it suffered a 30 percent earnings drop in its most
recent quarter. Only the fact that its finance business doubled
in profit kept the situation from worsening.
After two straight
years of gains in market share, it will have a hard time repeating
that performance. It currently has a U.S. market share of 27.9
percent, down from 28.6 percent for 2002, mostly because foreign
competitors launched a number of new models.
Despite extensive cost-cutting
measures throughout its business, the firm still has giant pension
and retiree health-care liabilities that continue to drag on
overall finances.
Nonetheless, it remains
aggressive, with plans to release up to 70 new car models in
North America from now until 2008, most of them mid-sized vehicles.
Already manufacturing the Buick Excell in China, it will assemble
at least three Cadillac models in that country in the next two
years.
General Motors (GM)
shares are up 12 percent this year, following last year's 21
percent decline. It offers the strongest dividend yield of the
major carmakers.
Some other positives:
GM is now rated best in initial quality by J.D. Powers among
the Big Three U.S. carmakers and ranks fifth best among all companies
that manufacture cars in this country. In addition, North American
chairman Bob Lutz, formerly of Chrysler, has been diligently
updating the carmaker's designs to make them more contemporary.
Partly because GM operates
in a deeply cyclical global industry, its shares currently receive
a consensus "hold" rating from the Wall Street analysts
who track them, according to the Boston-based First Call research
firm.
Representing a wide
range of opinions, that rating consists of three "strong
buys," one "buy," eight "holds," two
"sells" and one "strong sell."
GM earnings are expected
to decline 27 percent this year, versus the 13 percent decline
forecast for the auto industry. Next year's projected 5 percent
decline compares to a 9 percent gain forecast for its peers.
The company's predicted five-year annualized growth rate of 5
percent is in line with the industry.
GM agreed earlier this year to sell its Hughes Electronics subsidiary
to News Corp. Its brands include Buick, Cadillac, Chevrolet,
GMC, Pontiac and Saturn in the United States, in addition to
Opel, Saab and others abroad. North American sales account for
61 percent of revenues.
Q. I want to allocate more of my portfolio to value
stocks. What's your opinion of Vanguard Windsor Fund? - J.R., via the Internet
A. It's
a highly aggressive value fund that sometimes performs incredibly
well and at other times does horribly.
That means it requires
a lot of patience.
"Portfolio manager
Chuck Freeman searches for dollar bills he can buy at 50 cents,"
said Daniel Wiener, editor of The Independent Adviser for
Vanguard Investors (www.adviseronline.com), 7811 Montrose
Rd., Potomac, MD 20854. "The best period for this type of
fund holding cyclical stocks is when the economy is recovering
from recession, which is the type of period we're experiencing
now."
The $12 billion Vanguard
Windsor Fund (VWNDX) gained 18 percent over the past 12 months
to rank in the top 6 percent of all large value funds. Its three-year
annualized return of 1.45 percent put in the top 13 percent of
its peers.
Steeped in tradition,
Windsor has been around since 1958. Freeman has run it since
1995, seeking out low-priced stocks with significant dividends.
The firm Sanford C. Bernstein has managed one-fourth of assets
since 1999
Despite the nice pedigree,
it's not a fund that many investors should have in their portfolios,
Wiener contends. It has always been volatile and its results
aren't all that spectacular when looked at over a full market
cycle.
Nearly one-third of
Vanguard Windsor's holdings are currently in financial services,
with industrial materials and health care other significant groups.
Its largest stock holdings were recently Citigroup, Comcast Class
"A," Washington Mutual, Alcoa, Tyco International,
IBM, TJX, Pfizer, Health Net and Oxford Health Plans.
The "no-load"
(no sales charge) Vanguard Windsor requires a $3,000 minimum
initial investment. It has a low annual expense ratio of 0.45
percent.
A better choice in
the large-cap value category, in Wiener's opinion, is Vanguard
Windsor II (VWNFX) because it is less aggressive and doesn't
have as much downside volatility as its older sibling. It is
more diversified and, as Wiener puts it, "willing to pay
up to 75 cents for a dollar, not just 50 cents."
Outstanding Management and Outstanding Team of Analysts
Q. I'd like to know more about Fidelity Growth &
Income Fund. What's your opinion of this fund? - B.B., via the Internet
A. This
conservative fund that blends growth and value strategies was
left behind in the recent growth stock rebound.
That's often the price
one must pay for low risk. The fund avoided technology stocks
and dawdled during the 1990s bull market because of it. However,
it lost considerably less than many of its competitors in the
bear market that followed.
The $28 billion Fidelity
Growth & Income Fund (FGRIX) was up 11 percent over the past
12 months to rank in the lowest 10 percent of all large growth
and income funds. Its three-year annualized decline of 8 percent
put it in the upper one-fourth of its peers.
Problems at Freddie
Mac, Fannie Mae and Sallie Mae have triggered greater scrutiny
from Congress and regulators. Since these were major fund holdings,
they hurt results. The portfolio remains positioned for a sluggish
growth economy, with perhaps its best prospects in health-care
stocks that make up nearly one-fourth of its portfolio.
"Because we're
in a period that favors small-capitalization stocks, there's
no way this fund can take a sizeable position in them because
it's just too darn big," said Jack Bowers, editor of the
independent Fidelity Monitor (www.fidelitymonitor.com)
in Rocklin, CA. "It's a fund for someone who wants to buy
and forget about the investment for a long period of time."
It benefits from experienced
management and an outstanding team of Fidelity analysts. Portfolio
manager Steven Kaye has been on board for a decade, generally
emphasizing blue-chip stocks, seeking stocks with low valuations,
keeping portfolio turnover low and making long-term bets.
Financial services
represents another one-fourth of the fund's portfolio. The remainder
of the portfolio is quite diverse. Top stock holdings were recently
SLM, Fannie Mae, Microsoft, Pfizer, General Electric, ExxonMobil,
Wal-Mart Stores, Verizon Communications, Citigroup and American
International Group.
The no-load Fidelity Growth & Income Fund requires a $2,500
minimum initial investment and has an annual expense ratio of
0.68 percent.
Q. My husband has been considered a "highly
compensated employee" for the past three years. Why can't
he contribute the maximum amount to his 401(k) retirement plan?
- L.S., via the Internet
A. The good news is that he's bringing home a significant
paycheck.
That bad news is that the Internal Revenue Service doesn't want
to give him too much of a break on his retirement investing.
It requires that companies
make annual assessments to be sure that their workers whose gross
income is $90,000 or more aren't contributing a much greater
percentage of their salaries than other employees. Companies
must follow a government formula in determining this.
Basically, if the firm's
employees earning less than $90,000 annually are contributing
to the 401(k) plan at a lower rate than your husband, his contribution
limits will be lowered.
"Highly compensated
group at any company can only collectively contribute 2 percent
of pay more than the collective contribution rate of all of those
who make less than $90,000," explained David Wray, president
of the Chicago-based Profit Sharing/401(k) Council of America.
These rules were designed
to provide incentive for firms to encourage lower-paid employees
to participate in their 401(k) plan. It also assumes that highly
compensated employees will save in any tax-advantaged way they
can.
Q. I have a 401(k) retirement plan at work. With
the recent income tax and capital gains tax cuts, are "in-kind"
distributions a good idea? - M.H.,
Fenton, MO.
A. They
particularly make sense if you have a quality stock that has
appreciated in value.
In taking an in-kind
distribution at retirement or after age 59-1/2, you take possession
of distributions other than cash, which generally means company
stock or mutual funds. You must take all company shares you have
in your account, not just some.
You'll owe ordinary
income tax on the "cost basis" (original cost) of those
shares.
"If you get a
lump sum distribution and part of it includes company stock,
you're only taxed on the cost of the company stock to the plan,"
explained Martin Nissenbaum, national director of personal income
tax planning for Ernst & Young in New York. "For example,
if you get $100 worth of stock but the plan paid only $10 for
it, you'd only have to pay tax on the $10, and then if you sold
it, pay capital gains tax on the remaining $90."
You could sell the
next day and have $90 in long-term capital gains, to be taxed
at the maximum rate of 15 percent, he said.
Q. I am a 76-year-old married retiree. I have a sizable
individual retirement account invested in mutual funds and certificates
of deposit. I'd now like to purchase some stocks for my IRA.
Do I need a broker to do this?
- W.A., via the Internet
A. You can do a direct transfer of some or all of
your IRA money to a brokerage account that permits the purchase
of individual stocks.
First open an account
with the new IRA sponsor and fill out a form telling your old
sponsor of the transfer to the new account. You can move money
as often as you wish.
Or, you could do an
IRA rollover in which you transfer the money yourself.
In that case, the current
sponsor closes the account and gives you the money, which you
must send or take to the new IRA sponsor. If you don't make the
switch within 60 days, the money withdrawn from a traditional
IRA is taxed. If you're under 59-1/2, you also face a 10 percent
early-withdrawal penalty.
"Direct transfer
is really the preferred way to do this," said Ed Slott,
CPA and editor of Ed Slott's IRA Advisor (www.irahelp.com).
"In a rollover, not only do you have the 60-day rule, but
you can only do one rollover per year."
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.
