Q. What is your view of Johnson & Johnson Inc. stock? I'm 57 years old and looking to add to my investments in the hope of retiring in five years. - R.F., via the Internet
A. Based on its wide range of acquisitions, this diversified maker of health care products could call itself Broader & Broader.
It is buying cardiovascular-device producer Guidant Corp. in a $23.9 billion cash-and-stock deal that awaits approval by Guidant shareholders at a special meeting April 27. Johnson & Johnson shareholders aren't required to vote.
The Federal Trade Commission is reviewing that deal, which is expected to close by the end of October, because Guidant and J&J are among the few companies manufacturing heart stents to keep arteries propped open.
The firm is also paying $370 million for Closure Medical Corp., a maker of medical glue whose Liquid Bandage is distributed by J&J. It is spending $230 million for TransForm Pharmaceuticals, which does research in formulations of drug molecules.
Its own Band-Aids, Johnson's Baby Shampoo, Tylenol and Splenda non-caloric sweetener are already familiar to consumers.
This consistently profitable firm has a AAA credit rating and a reputation for letting local managers be creative. The three major divisions - pharmaceuticals, medical devices and consumer products - have 200 operating companies.
J&J, its stock recently trading around its 52-week high, earned $8.5 billion last year, up 18 percent from 2003. Sales of $47.3 billion were up 13 percent, marking the 72nd consecutive year of sales growth.
As a reward, Chairman and Chief Executive William Weldon received total compensation last year of $5.65 million, including salary, bonus and perks, 26 percent more than he made in 2003.
Yet the company faces stiff competition, with its popular anemia drug Procrit declining in market share, antipsychotic medication Risperdal facing new rivals, and painkiller Duragesic losing patent exclusivity. Fortunately, its drug pipeline is strong.
Not everything goes its way: A recent J&J "reality trial" testing its drug-eluting stents against those of Boston Scientific Corp. showed no statistical difference in effectiveness.
The consensus recommendation on J&J stock (JNJ) from analysts who track it is a "buy," according to the Boston-based Thomson First Call research firm. That consists of four "strong buys," nine "buys" and six "holds."
Earnings are expected to increase 10 percent this year, compared to 5 percent predicted for the major drug industry. Next year's projected 10 percent gain compares to 12 percent forecast industrywide. The expected five-year annualized growth rate of 11 percent is the same as for its peers.
Q. I retired from Sears, Roebuck and Co. many years ago and have a large part of my retirement funds in its stock. What is your opinion of the company? - W.L., Willowbrook, IL.
A. The $12.3 billion purchase of Sears by Kmart Holding Corp., which recently emerged from bankruptcy, creates the nation's third-largest retailer.
It also creates questions for investors, such as whether two struggling discounters are really better off operating together than they were apart. For now, opinions range from wary to hopeful.
The new firm, to be called Sears Holdings Corp. (to trade on the Nasdaq Stock Market under the symbol SHLD), must demonstrate that it can increase sales, cut costs and extract value from its real estate holdings if it is to be taken seriously by Wall Street.
These two brand-name companies, with nearly 3,500 stores, will operate separately, at least for now, with combined headquarters in Hoffman Estates, Ill. Well-known Sears brands such as Craftsman and Kenmore will be sold in Kmarts.
To take on powerful rivals Target and Wal-Mart, a new midsize "Sears Essentials" store format is being launched outside its traditional malls, starting with 50 stores that Sears bought from Kmart and Wal-Mart Stores last summer. Four hundred Kmart stores will be converted to this new format over the next three years.
Meanwhile, 375 jobs are being cut at the Sears-owned Lands' End chain to streamline its operations. Sale of that business has been discussed with potential buyers.
Ed Lampert, the billionaire Kmart chairman who engineered the merger because he believes it will result in significant cost savings, will be chairman of Sears Holdings. Lampert's hedge fund, ESL Investments, is the largest shareholder in Kmart and Sears. Sears Chairman and Chief Executive Alan Lacy will be CEO.
"Although there is well-defined potential for the new entity to succeed, the combination of heightened business risk, intense competition and possible underachievement in the company's off-mall strategy could lead to sales and margin problems, as well as deteriorating credit measures," Standard & Poor's analysts cautioned in a recent report.
The merger was approved by shareholders of both companies Thursday.
Major credit agencies have decided to assign the new firm's bonds their highest "junk" credit rating. Meanwhile, Sears (S) shares, up 12 percent in value this year, recently received consensus analyst "hold" ratings, according to the Boston-based First Call research firm.
Analysts had projected Sears earnings to increase 35 percent this year, versus 16 percent predicted for the retail industry, according to First Call. Next year's estimated 14 percent rise compares to 15 percent expected for its peers.
Q. I bought Lucent Technologies Inc. stock in 1999 and held on. With my shares now worth a fraction of their original purchase price, are they ever going to bounce back? - C.L., via the Internet
A. The financial story of the top boss of this giant supplier of communications equipment, software and services has been considerably more upbeat than yours.
The company doubled the total compensation of Chairman and Chief Executive Patricia Russo to $13.6 million in 2004 as it posted its first profit in four years. That payout included salary, bonus and stock options.
Events since your stock purchase included the telecommunications crash, multibillion-dollar losses at Lucent and an 80 percent reduction in workforce through spin-offs and layoffs. Cost reductions and improved efficiencies remain top priorities as the firm navigates a fiercely competitive environment.
Lucent shares (LU) are down 14 percent this year, following gains of 32 percent in 2004 and 125 percent in 2003. Shareholders authorized a reverse stock split designed to boost share price, though the value of an individual's holdings will remain the same.
The firm's near-term future depends on the speed of the telecom industry resurgence. Emphasizing strong relationships with established firms, Lucent has won numerous contracts that include upgrading the wireless networks of Verizon, Sprint and Cingular.
Lucent boasts almost twice the market share of its nearest rival in its sector of the wireless-equipment business. Its wireless division's profits have risen significantly, though its wireline earnings are in decline. Its research arm, Bell Labs, has more than 6,000 patents.
The positives are why Lucent might become a takeover target. But though it has lots of cash, its negatives include heavy debt obligations and rising benefit payments to pensioners, who outnumber its active workers 5-1.
Lucent stock rates a consensus "hold" from Wall Street analysts who track it, according to the Boston-based Thomson First Call research firm. That consists of three "strong buys," two "buys," 21 "holds," six "sells" and one "strong sell."
Earnings are expected to increase 21 percent for its fiscal year that ends in September, versus 16 percent forecast for the communications equipment industry. Next fiscal year's growth rate is projected to be 18 percent, compared with 19 percent for its peers. The expected five-year annualized growth rate of 5 percent trails the industrywide forecast of 15 percent.
The Communications Workers of America and the International Brotherhood of Electrical Workers approved a contract with Lucent that calls for raises of 16 percent over the next seven years.
Q. I owned shares of the Brandywine Fund in the past and sold them. Now I'm thinking of getting back in. What is your opinion of the fund? - F.R., via the Internet
A. It never wastes time in going after what it wants.
This famous well-managed fund snaps up the stock of profitable companies of any size that are growing rapidly, sells them when they reach certain target levels and then reloads.
The $3.62 billion Brandywine Fund (BRWIX) has gained 7.24 percent over the past 12 months and had a three-year annualized return of 6.85 percent. Both results rank in the upper half of all mid-cap growth funds.
"We really like the Brandywine Fund because it has a lot of people in research, its performance has been consistent, and it is less volatile than its peers," said Karen Papalois, analyst with Morningstar Inc. in Chicago. "But keep in mind that it trades a lot, which is an extra cost, and that it should generally be considered an aggressive holding that will complement core holdings."
The Brandywine fund family has more than two dozen researchers for its three funds.
Well-respected William D'Alonzo has been this fund's lead portfolio manager since 1985, and all of those in its management are heavily invested in it. Foster Friess, the fund family founder and chairman, is involved in the research process and is its largest shareholder. D'Alonzo also runs larger-cap Brandywine Blue Fund and mid-cap Brandywine Advisors Fund.
As an aggressive fund, Brandywine understandably did poorly in 2001 and 2002. While it is billed as an all-cap fund, enormous asset size has dictated that its more recent growth has been in mid- and large-cap stocks. Its high portfolio turnover rate can produce significant capital-gains distributions for shareholders.
The industrial materials sector currently represents 28 percent of the fund. Other significant concentrations include business services, energy and consumer services. Largest stock holdings are Tyco International, U.S. Steel, MBNA, Companhia Vale Do Rio Doce, Ingersoll-Rand, Phelps Dodge, Allstate, Weatherford International, Avaya and Chesapeake Energy.
This "no-load" (no sales charge) fund requires a hefty $10,000 minimum initial investment. Its annual expense ratio is 1.08 percent.
Q. I have three-fourths of my portfolio in my core holding, Vanguard Wellington. What do you think of this fund? - C.E., via the Internet
A. Some funds do maintain their past glory.
This conservative stock-and-bond fund with a superb track record could provide a solid foundation for anyone's investment portfolio. It also boasts a low annual expense ratio of 0.36 percent.
The only time it is likely to lag is when technology is a market leader, as was the case in growth-oriented 1999.
The $28 billion Vanguard Wellington Fund (VWELX) gained 10 percent over the past 12 months and had a three-year annualized gain of 6.5 percent. Both results ranked within the top 15 percent of its peers.
"Vanguard Wellington is one of our favorite 'moderate' allocation funds and has done well for a very long time," said Sonya Morris, an analyst with Morningstar Inc. in Chicago. "It prefers high-quality giant and large companies with dominant franchises and dividends, along with high-quality corporate and Treasury bonds."
Paul Kaplan has been in charge of the bond portion since 1994, while Edward Bousa has managed the stock component since late 2002. Both have years of experience and fine records.
"It is one of the largest funds out there," acknowledged Morris. "However, because it focuses on large, highly liquid stocks and has a low turnover strategy, we don't see its size as a problem."
About two-thirds of the portfolio is in stocks, with about one-third in bonds. Its major concentrations were recently in industrial materials, financial services and energy. The top holdings were recently U.S. Treasury notes, Citigroup, GNMA, IBM, Bank of America, Abbott Laboratories, EnCana, Verizon Communications, Exelon and Total SA.
This "no-load" (no sales charge) fund requires a $3,000 minimum initial investment. Neither this fund nor its adviser, The Vanguard Group, has been investigated by regulators in the past three years, and its low-expense emphasis has always been a boon to individual investors.
Q. A mutual fund that I own closed to new investors in December. Why do funds close, and is it good for investors? - J.P., via the Internet
A. Mutual funds generally close because accepting additional money after they reach a certain asset size could make their portfolios unwieldy and less efficient overall.
For example, portfolio managers may not be seeing enough good ideas in which to invest and fear they'll wind up sitting on lots of cash if their asset size continues to grow.
"Inefficiency is especially a problem for small-cap funds because they could be forced to buy larger-company stocks," explained Paul Merriman, president of Merriman Capital Management in Seattle. "In addition, asset size can be more of a problem for value-oriented funds than growth funds because value stocks are less liquid."
Some funds may close for strictly marketing reasons. That's because an announcement that a fund with a good track record is closing in 60 days can create a rush of investors trying to beat the deadline, said Merriman. A well-managed fund will simply say it is closing and do it right away, he believes.
"You must also be careful about 'style drift,' because as a fund gets larger it often drifts in style from what made it all the money in the first place," warned Merriman.
Editor's Note: Andrew Leckey answers questions for Bull & Bear readers only through the column. Address inquiries to Andrew Leckey, #184, 369-B Third St., San Rafael, CA 94901-3581, or by e-mail at andrewinv@aol.com.
