Q. What can you tell me about my shares of Merrill Lynch & Co.? I was hoping for a little better performance from them. - J.D., Milwaukee, WI.
A. The Merrill Lynch bull snorts more quietly when the economy and financial markets are in a funk.
The company's earnings slipped 3 percent in its most recent quarter, to $1.21 billion, attributed by management to a continuing difficult business environment.
In addition, Morgan Stanley became the largest securities firm in total capital last year, ending 17 years of Merrill Lynch holding the top spot. Morgan Stanley had $110.8 billion in equity capital and long-term debt, while Merrill Lynch, with $102.6 billion, fell to third place, behind Goldman Sachs.
Merrill Lynch, however, still leads Wall Street in number of brokers and in global equity offerings. It is No. 3 in mergers and acquisitions, serving as adviser on blockbuster deals such as Procter & Gamble Co.'s $57 billion proposed acquisition of Gillette Co.
Merrill Lynch shares (MER) are down 11 percent this year after a 2 percent gain last year.
Although earnings were down, they beat Wall Street expectations. The company has confidently increased its dividend by 25 percent and announced a $4 billion stock buyback plan. It is acquiring the pension asset management business of Dutch Philips Electronics, gaining more than $10 billion worth of securities assets.
Based on a belief that all this financial-services giant really needs is an expanding economy, the consensus analyst recommendation on shares of Merrill Lynch is currently a "buy," according to Thomson First Call. This consists of six "strong buys," eight "buys" and four "holds."
Merrill Lynch named Chief Financial Officer Ahmass Fakahany vice chairman and chief administrative officer. He had directed the massive overhaul of the company's balance sheet. Stanley O'Neal has been chief executive since 2002, the first non-broker in the top position. Fakahany and O'Neal are focused on improving profitability.
Earnings are expected to rise 10 percent this year, versus the 12 percent forecast for the investment-services industry. Next year's projected 11 percent increase compares with 8 percent expected industrywide. The firm's projected five-year annualized increase is 5 percent, the same as its peers.
The company was recently fined $13.5 million by the New York Stock Exchange because a group of its brokers had engaged in improper market-timing of mutual funds. On a somewhat more positive note, a federal judge in Houston recently gave two former Merrill Lynch officials substantially shorter prison sentences than the government had sought in connection with a bogus deal involving Enron Corp.
Q. Is Southwest Airlines Co. a stock worth owning? - R.T., via the Internet
A. This aggressive discount carrier long ago exceeded the regional borders implied in its name.
For example, it recently initiated service at Pittsburgh International Airport with 10 daily nonstop flights, raising its total destinations to 59. When ATA Airlines filed for bankruptcy protection, Southwest bought some of its gates at Chicago's Midway Airport.
Specializing in short hauls and leisure business, Southwest is considered the most efficient and financially conservative company in the airline industry. However, investors must first determine whether they feel comfortable investing in this volatile industry at all.
Southwest features streamlined procedures at gates, uses a single type of aircraft to save on maintenance, finances its growth internally and has a loyal customer base. Thirty-two straight years of profitability are impressive.
Yet it must cope with upstart discounter JetBlue Airways Corp. entering some of its markets. Although Southwest has admirably kept labor and maintenance costs under control, these are likely to creep upward. There are always unpredictable fuel and weather trends to contend with as well.
Shares of Southwest Airlines (LUV) are down 6 percent this year, following gains of 1 percent last year and 16 percent in 2003.
First-quarter earnings of $76 million nearly tripled the results of a year earlier and beat Wall Street expectations. However, this was accomplished through hedging maneuvers, in which options were used to buy 86 percent of its fuel in advance at lower prices. This cut its energy expenses by $155 million.
After raising fares in March, Southwest did not match the most recent round of rate hikes by the major carriers. It plans to increase its fleet by 29 planes this year and 34 next year.
The consensus recommendation on Southwest stock from Wall Street analysts is currently a "buy," according to Boston-based Thomson First Call. That consists of three "strong buys," six "buys," two "holds" and one "sell."
The carrier's earnings are expected to increase 29 percent this year. Next year's earnings are projected to rise 13 percent. The five-year annualized growth rate is expected to be 15 percent.
Chief Executive Gary Kelly, promoted from chief financial officer in July when Jim Parker retired, received a 25 percent raise, to $322,436, and a $220,000 bonus. He also got options for 214,352 shares.
Q. Is Amazon.com Inc. a good stock for an average investor? - L.B., via the Internet
A. This well-known Internet retailer is hoping to inject a little magic into its bottom line.
It says it will deliver "Harry Potter and the Half-Blood Prince" to U.S. customers on July 16, the first day the book is available to the public, at standard shipping rates. This sixth J.K. Rowling novel in the Potter series became available by pre-order in December.
Hocus-pocus would also come in handy in battling brutal competition from rivals such as Overstock.com, eBay, Target, Best Buy and Wal-Mart.
Amazon.com shares (AMZN) are down 25 percent in value this year, following last year's 16 percent decline. They might be a bit volatile for the average investor. The company markets books, music, videos, tools, small appliances and electronics over the Internet.
First-quarter earnings were down 30 percent even though revenues rose 24 percent. The company spent considerable money opening new distribution centers and improving the technology and content of its Web site.
Amazon.com is hustling for new business, though it is hard to say which of its latest ventures will pan out. It bought BookSurge LLC, a publishing company founded in 2000 that prints books when ordered rather than stocking warehouses. Print-on-demand is a promising concept for books needed in smaller quantities.
A flat annual membership fee of $79 by which customers can receive unlimited two-day shipping was introduced. In addition, its free search subsidiary, A9.com, features millions of street-level photographs in a local business directory so potential customers can also have a look at a firm's exterior.
The consensus rating on Amazon.com shares is a "hold," according to Boston-based Thomson First Call. That consists of two "strong buys," four "buys," 11 "holds," four "sells" and three "strong sells."
Amazon.com's business is more profitable than brick-and-mortar bookstores. It also has plenty of international growth opportunities, though it would be hurt if larger overseas markets experienced economic problems. It is paying down its debt, though it still has a lot of it.
Amazon.com earnings are expected to rise 14 percent this year, versus 16 percent predicted for the specialty retailing industry. Next year's projected 22 percent increase compares with a 15 percent forecast for its peers. The five-year annualized growth rate is expected to be 21 percent, versus 15 percent predicted industrywide.
Q. I need a foreign fund to round out my portfolio. What do you think of Wasatch International Growth Fund? - A.M., via the Internet
A. It's an expensive fund with an annual expense ratio of 1.92 percent. Furthermore, it was launched in mid-2002 and you might want to wait a while longer to see it develop a track record in foreign investing.
The $282 million Wasatch International Growth Fund (WAIGX) had a 12-month return of 15.24 percent to rank in the lowest 3 percent of foreign small- and large-cap growth funds.
"I wouldn't give this fund the 'thumbs up' because, with its middling results and considerable volatility, it is not the best fund of its type out there," said Kai Wiecking, analyst with Morningstar Inc. in Chicago. "There is also somewhat of a disadvantage in the fund's manager being based in Denver when the investment emphasis is on European and Asian markets and the company managements there."
Portfolio manager Mike Gerding, previously a manager with Denver Investment Advisors and Founders Asset Management, uses quantitative growth screens and fundamental research that includes frequent company visits. He seeks small growth stocks at reasonable prices and has a talented research staff to get this task done.
There are currently 88 company names in the portfolio, with developed markets the primary emphasis. About half of the portfolio is in the United Kingdom and Western Europe. It also has significant holdings in Japan, India and China, with Latin America and the United States less important players in its overall portfolio.
Health care, consumer services and business services are its largest concentrations. It owns fewer industrial materials stocks than are represented in the broad international indexes. The fund's top holdings recently were AWD Holding of Germany, Puma AG of Germany, PARK24 of Japan, United Drug of Ireland, SOCO International of the United Kingdom, Orpea of France, Cairn Energy of the UK, Carphone Warehouse Group of the UK, Home Capital Group of Canada and En-Japan Inc. of Japan.
This "no-load" (no sales charge) fund requires a $2,000 minimum initial investment.
Q. I'm interested in shares of Putnam Voyager Fund and would like to know if you think it is a good fund. - K.C., via the Internet
A. There's been a lot of deck-chair shuffling on Putnam's flagship large-cap fund.
Because of its lackluster performance, Brian O'Toole was brought in as its leader in mid-2002. When results didn't improve, a new team led by Robert Ginsberg and Kelly Morgan was put in charge last March.
It continues to follow a strategy of selecting a diversified mix of stocks based on a blend of fundamental and quantitative models in an attempt to beat the Russell 1000 Growth Index.
While the company's senior management gives this $7.9 billion giant plenty of attention, it has been struggling for so long that it is difficult to be confident about it getting better soon.
Putnam Voyager (PVOYX) declined 1.51 percent over the past 12 months and had a three-year annualized decline of 0.40 percent. Both results rank in the lowest one-fourth of large growth funds.
"We're not recommending that investors buy this fund at this point," said Dan McNeela, analyst with Morningstar Inc. in Chicago. "For those already on board, Putnam, with its new team, seems to be taking risk controls much more seriously, so it is a question of how patient you are waiting for a turnaround."
There are better choices available in this type of fund, McNeela said.
One-fourth of Putnam Voyager's portfolio is in health care, with consumer services and hardware its other major components. Top stock holdings recently were Johnson & Johnson, Microsoft, Pfizer, Cisco Systems, Home Depot, Intel, Dell, Qualcomm, Adobe Systems and Wal-Mart Stores.
This 5.25 percent "load" (sales charge) fund requires a $500 minimum initial investment. Its annual expense ratio is 1.04 percent.
Putnam, a rapidly growing investment company during the growth bull market, became enmeshed in the mutual fund scandal in 2004 and subsequently sent former Chief Executive Larry Lasser and several fund managers packing. It agreed to pay $110 million in fines and restitution. New CEO Ed Haldeman has been working hard to restore the company's name, and numerous measures have been taken to comply with regulator wishes.
Q. What is your opinion of investing money in closed-end funds? I am nearing retirement age. - N.P., via the Internet
A. While closed-end funds have been around longer than conventional open-end mutual funds, they're not as well-known. Their shares are bought and sold like stocks with the same commission charges, and their prices will fluctuate.
Closed-end funds sell a fixed number of shares at the initial public offering that trade on a secondary market such as the New York Stock Exchange or Nasdaq stock market. Importantly, shares may sell for more or less than their net asset value - a distinguishing trait that makes them more attractive than mutual funds to some enterprising investors.
They're not required to buy back their shares from investors upon request, as mutual funds must do. These funds are actively managed by separate investment advisers.
"The investor in a closed-end fund first must determine his view of the securities the fund holds," explained Thomas Herzfeld, president of Miami-based Thomas Herzfeld Advisors, which specializes in closed-end funds. "Secondly, he must take a look at whether the fund's discount to its net asset value is attractive."
Since you're nearing retirement, Herzfeld noted, consider those closed-end funds with capital preservation as an objective.
Q. I have begun to buy and sell stocks more frequently than in the past. I have been told I need to be careful about wash sales. What do I need to keep in mind about that tax rule? - G.K., via the Internet
A. A wash sale occurs when you sell a security at a loss and, within 30 calendar days before or after that sale, buy substantially the same security.
To prevent investors from trying to generate losses while staying in the same position, the IRS does not permit you to take a deduction for a loss on a wash sale.
"While you can't take a loss at that point, the loss gets added to the basis of the new securities," explained Martin Nissenbaum, national director of personal income tax planning for Ernst & Young in New York. "It is deferred until you ultimately sell the new securities without having another wash sale."
You can avoid a wash sale by either waiting 31 days after the sale before buying additional stock, by buying stock of a different company in the same industry, purchasing a mutual fund managed by a different investment firm, or buying a bond issued by a different municipality or company.
Q. What is your opinion of using call options on stocks? Is it a good idea? - R.T., via the Internet
A. Options are versatile securities that can be used to speculate or to reduce risk. They represent a privilege sold by one party to another that offers the buyer the right, but not the obligation, to buy or sell a security at an agreed-upon price during a certain time period or on a specific date.
A call gives the right to buy, while a put gives the right to sell. A call becomes more valuable as the price of the underlying stock appreciates.
"Investors mainly use call options to obtain a position in a stock when they don't have the capital to purchase the stock outright, since a call option requires much less capital," explained John Kvale, certified financial planner and president of JK Financial Inc. in Dallas. "However, if you purchase a call option and the stock goes nowhere, you're likely going to lose some money."
The problem with the option market is that it is not as liquid as the stock market and there is lots of volatility, Kvale noted. An individual investor trying to speculate in options, rather than using them to hedge, must therefore be extremely careful.
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, Calif. 94901-3581, or by e-mail at andrewinv@aol.com.)
