Q. Will my shares of Merrill Lynch & Co. have a revival? - C.M., via the Internet
A. It has acknowledged that it handled risks badly in subprime mortgages and other structured debt products.
In fact, its global head of fixed income and the co-head of fixed income for the Americas recently left the firm.
But it is still Merrill Lynch: It remains the nation's largest brokerage firm and a global financial powerhouse.
The investment firm will report a loss in the third quarter as it takes $5.5 billion in write-downs from collateralized debt obligations (known as CDOs), subprime mortgages and other debt products. It has significantly reduced its involvement in CDOs, which are pools of debt instruments packaged by the company.
Shares of Merrill Lynch (MER) are down 19 percent this year following last year's 37 percent gain.
Not until a mid-September filing for its $1.8 billion acquisition of First Republic Bank did the company reveal its significant financial exposure to mortgages and related troubles. It plans to cut an unspecified number of jobs at its First Franklin Financial Corp. division. Acquired for $1.3 billion in the past year, First Franklin was one of the nation's biggest subprime mortgage originators.
Despite its problems, the financial giant receives a solid consensus "buy" rating from Wall Street analysts, according to Thomson Financial. That consists of six "strong buys," 10 "buys," two "holds" and one "underperform."
Chairman and Chief Executive Stan O'Neal said in a recent statement there is "evidence of strong long-term growth trends in each of our global businesses." Merrill Lynch boasts $1.6 trillion in client accounts and 16,000 financial advisers who are consistently ranked as the best earners in the industry.
It has a strong distribution network and has one of the largest capital markets groups and investment banks. It also has half-interest in the BlackRock money management firm it acquired last year.
It also knows when to sell: Aegon N.V. is buying its Merrill Lynch Life Insurance Co. and ML Life Insurance Co. of New York for $1.3 billion, including excess surplus cash of $425 million.
Next year's projected increase in Merrill Lynch earnings is 6 percent versus the 14 percent forecast for the national investment brokerage industry, according to Thomson. The expected five-year annualized growth rate of 11 percent compares to 13 percent expected for its peers.
Q. Now that Chrysler is no longer a part of the company, what is the situation for Daimler AG and its shares? - R.M., via the Internet
A. The German automaker is giving the general impression that a houseguest has finally left after an extended visit.
Relieved to bid goodbye to all but 19.9 percent of money-losing Chrysler, Daimler has said it expects to return to double-digit operating margins by 2010 at the latest.
Top boss Dieter Zetsche - known in the United States as the star of Chrysler's "Dr. Z" car commercials - said the new Daimler "starts on a very solid and healthy basis." His companywide program of operational improvements and cost-cutting since assuming his post in mid-2005 is helping the bottom line.
Fortunately, he does not share predecessor Juergen Schrempp's burning desire to lead the world's largest automaker, an ambition that led to the Chrysler merger.
Not that the high-end luxury car segment is a pleasure ride either: The automaker has had to work hard to overcome quality-control problems in the building of Mercedes vehicles. It faces tough European unions and a host of aggressive luxury car competitors.
Shares of Daimler (DAI) are up 63 percent this year following a gain of 20 percent last year.
The company has a large cash reserve and will use some of it to buy back up to 10 percent of its stock. Many analysts predict continued dividend increases and share repurchases over the next several years.
Profits declined 14 percent in its second quarter amid the sale of Chrysler. Daimler is taking a $3.38 billion charge from transferring 80.1 percent of Chrysler to private-equity firm Cerberus Capital Management for more than $7 billion.
At the new Daimler, cars now account for just over half of revenues; trucks, vans and buses for one-third; and the lucrative financial-services unit represents the rest. The company employs about 375,000 people worldwide.
The consensus Wall Street rating of Daimler shares is between a "buy" and a "hold," according to Thomson Financial. That consists of three "strong buys," two "holds" and one "underperform."
The company expects improved cash flow and a better balance sheet, thanks in part to shedding the $20 billion in Chrysler post-retirement health-care liabilities. Meanwhile, the new generation of Mercedes C-Class sedans, the company's best-seller, should help this year's bottom line.
Daimler earnings are expected to increase 46 percent this year and 22 percent next year, according to Thomson.
Q. I don't know what to think of my shares of Alcatel-Lucent SA. I would like to know if there is hope for the future. - R.V., via the Internet
A. Can this marriage be saved?
French firm Alcatel bought U.S.-based Lucent late last year for $11.6 billion to form the world's largest vendor of telecommunications equipment. The combined firm takes aim at aggressive competitors such as Sweden's L.M. Ericsson AB.
Critics have said the deal merely created a bigger, financially weak company that is using cost-cutting and job reductions as its primary strategies.
For example, it intends to eliminate more jobs than the 12,500 worldwide announced in February. There also is a heavy load of Lucent pension liabilities that could cause financial problems.
The company recently issued its third profit warning of this year. Expenses associated with the merger, weak North American wireless sales and declining product prices are taking their toll.
Competitors are making a strong push, sensing the company's weakness. For example, Ericsson claims to be gaining share in emerging markets.
Two key executives, each once considered a potential successor to Chief Executive Patricia Russo, have left the company. Frank D'Amelio, in charge of integrating the two companies, departed to become chief financial officer at Pfizer Inc. Mike Quigley, in charge of the combined company's strategy, returned to Australia.
Shares of Alcatel-Lucent (ALU) are down 35 percent this year following last year's 15 percent gain and a 21 percent drop in 2005.
Investors hope this is a transition year and things will improve. Alcatel-Lucent remains one of few giant, diversified telecom-equipment vendors, and Russo expresses confidence that the merger will improve profit margins. It is the global leader in broadband access equipment.
The consensus rating of the company's stock by Wall Street analysts is midway between "buy" and "hold," according to Thomson Financial. That consists of six "strong buys," one "buy," nine "holds," two "underperforms" and one "sell."
It isn't standing still. The company received a $400 million contract from Reliance Communications Ltd., one of India's largest mobile phone companies, and a $100 million contract from Hits Telecom in Uganda. It was part of a group of companies that won a $20 billion contract with the U.S. government to develop a communications network for federal offices.
Earnings are expected to decline 52 percent this year and increase 168 percent next year, according to Thomson. The five-year annualized return is projected to be 11 percent.
Q. The Fidelity Fifty Fund has been recommended to me. Is this a good fund? - M.R., via the Internet
A. As its name implies, it is a highly concentrated fund.
It holds about 50 stock names, and about half of its portfolio is invested in its top 10 holdings. This places considerable emphasis on the stock-picking abilities of its portfolio manager.
Since taking charge in November, Peter Saperstone has improved performance of the fund. It had extended hot streaks in the past but could be inconsistent.
The $1.7 billion Fidelity Fifty Fund (FFTYX) gained 28 percent over the past 12 months and has a three-year annualized return of 17 percent. Both results rank in the top 10 percent of large growth funds.
"I would recommend this fund for investors looking to complement an existing large-cap growth fund that they already own, but it isn't a core holding," said Jim Lowell, editor of the independent Fidelity Investor newsletter (www.fidelityinvestor.com) in Potomac, Md. "With such a concentrated portfolio, even a handful of 'dogs' could easily disrupt performance."
Since taking over, Saperstone increased the size of Fidelity Fifty's top positions while reducing the overall number of holdings. The fund can invest wherever it wishes, but it tends to focus on large-cap growth stocks. It enjoyed strong gains in its stock of Navteq Corp., a digital mapmaker. It also has made a significant bet on AT&T Inc.
Though Saperstone appears to be the right manager for such a concentrated fund, Lowell believes that won't alter its inherent stock-specific risk. Everything rests on its portfolio manager's shoulders. But here's a positive: Since 2001, Saperstone has capably managed Fidelity Advisor Mid Cap Fund, posting a fine record there.
Among Fidelity Fifty's significant sector concentrations, technology hardware represents 19 percent; business services and telecommunications each 16 percent; and media 13 percent. Top stocks are AT&T, Time Warner Inc., Walt Disney Co., Harman International Industries Inc., Navteq, Hertz Global Holdings Inc., Agilent Technologies Inc., Sears Holdings Corp., Juniper Networks Inc. and American Tower Corp.
The "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has a low annual expense ratio of 0.83 percent.
Q. I've had money in Janus Fund for some time and wonder if it is still a good bet. What do you think? - F.R., via the Internet
A. The holdings of this classic large-cap growth fund are well-researched by manager David Corkins and the Janus team of analysts.
They seek growth at companies possessing catalysts capable of improving their prospects, such as new products or opportunities. Unlike many growth funds, the funds that Corkins managed in the past held up well during the bear market.
The $12 billion Janus Fund (JANSX) has a 12-month return of 22 percent and a three-year annualized return of 13 percent. Both results rank in the upper half of large growth funds.
"We recommend the Janus Fund because it represents a good way to play a growth investment comeback through one of the better funds Janus offers," said Karen Dolan, analyst with Morningstar Inc. in Chicago. "Corkins has done a good job of reshaping the portfolio since taking over on Feb. 1, 2006, and doesn't pay up too much for stocks."
The fund doesn't overemphasize sectors, instead focusing on strong free cash flows and high returns on invested capital. It prefers management that is oriented toward shareholders.
Corkins took over after several years of mediocre results by Janus Fund. Corkins had solid results when previously managing Janus Growth & Income Fund and Janus Mercury Fund. Yet no one can ever remove all volatility from growth funds, because their stock prices are based on growth prospects.
"I think this fund will do better on the downside than other growth funds," Dolan said. "Nonetheless, one of the risks with growth funds in general is potential downside."
Industrial materials represent 16 percent of the portfolio, financial services 15 percent, and technology hardware 13 percent. Top holdings were recently Boeing Co., Exxon Mobil Corp., JPMorgan Chase & Co., General Electric Co., Roche Holding Ltd., Procter & Gamble Co., NRG Energy Inc., Texas Instruments Inc., Precision Castparts Corp. and EMC Corp.
This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has an annual expense ratio of 0.90 percent.
Q. What are the differences between international, global and foreign funds? I hear each discussed and I'm not sure if they're the same thing. - F.T., via the Internet
A. International and foreign funds are the same thing, investing in companies headquartered outside the United States.
Global funds invest in both overseas and domestic stocks. How that portfolio is divided depends on how markets at home and abroad are performing and the fund's stated goals.
"International funds are good for pure international stock exposure, which usually protects you against a falling dollar," said Mark Salzinger, publisher of The No-Load Fund Investor (www.noloadfundinvestor.com), in Brentwood, Tenn. "They also give the potential benefit of overseas securities that aren't accurately priced (enabling sophisticated managers to snap up bargains) and stronger growth in certain countries."
Salzinger would select a global fund because he likes a fund overall and not so much for international diversification.
"It used to be that fund companies with global stock funds would have one manager handle the U.S. portion and another manage the foreign part," Salzinger said. "Now it is common to have one manager in charge of all the stocks."
His personal choice in a global fund is T. Rowe Price Global Stock Fund (PRGSX), while his favorite foreign fund is Dodge & Cox International Stock Fund (DODFX).
Q. I receive a number of proxy statements from companies and must admit that I just throw them out. Do people actually vote and turn them in? Do they make any difference? - N.M., via the Internet
A. The Securities and Exchange Commission requires that shareholders receive a proxy statement prior to a shareholder meeting, whether it is an annual or special meeting. Important facts about the issues being voted upon must be disclosed in the proxy.
Investors don't always toss their proxies; it depends on how important they feel the issues are. Lately, shareholders at a number of companies have had minds of their own.
For example, H&R Block Inc. shareholders recently voted to unseat three management-backed directors and replace them with nominees pushed by dissident shareholder Richard Breeden, a former SEC chairman. Breeden has contended that Block should focus on its core tax business and move away from securities, banking and lending.
"Proxy statements are basically ballots on which you respond to the issues with a yea or a nay," said Sam Stovall, senior investment strategist with Standard & Poor's Corp. in New York. He said that although many measures pass with few votes from smaller investors, "the proxy is still the individual shareholder's opportunity to have a say in what happens to their stock."
Q. A few years ago, I bought a stock with a margin loan from my discount broker. I own several stocks and they have performed well, including the one bought on margin. Should I pay off the loan or continue to pay the margin interest? Are there tax consequences of which I should be aware? - J.S., via the Internet
A. You can deduct a margin account's investment interest expense, though the deduction is limited to your income from investments. That deduction makes margin loans preferable to credit card debt.
"If you have higher interest-rate debt than the margin loan, pay off the higher interest first," said David Bendix, certified financial planner and certified public accountant with Bendix Financial Group in Garden City, N.Y. "If that's not the case and you also have extra money to pay off the margin loan without having to sell any of the stock, it could make sense to pay it off."
Margin borrowing increases your market risk, and you must repay the loan regardless of the underlying value of the securities. If the stock falls below minimum price requirements, you will be asked to deposit additional cash or acceptable collateral. If you fail to meet that call, the brokerage may sell some or all of your securities to protect its loan.
Editor's Note: Andrew Leckey answers questions for Bull & Bear readers only through the column. Address inquiries to Andrew Leckey, P.O. Box 874702, Tempe, AZ 85287-4702, or by e-mail at andrewinv@aol.com.
