Q. Why haven't my shares of PepsiCo Inc. continued upward this year as usual? - F.W., via the Internet
A. Rising commodity costs and declining domestic sales of carbonated drinks are challenges for the global beverage and food producer.
Items such as wheat, milk, oranges, corn, sugar and energy are expected to cost 6 percent more this year, the company projects. Meanwhile, its U.S. soft-drink volume declined 2.7 percent last year, the same as rival Coca-Cola Co., according to industry publication Beverage Digest.
PepsiCo (PEP) shares are down 5 percent this year following last year's 21 percent advance, and gains of 6 percent in 2006 and 13 percent in 2005. The company plans to buy back $4.3 billion of its stock this year.
The sweeter long-term view is the fact that PepsiCo has been able to raise prices and possesses 16 global brands with sales of more than $1 billion. Its Frito-Lay subsidiary is the world's biggest snack-foods company.
Although ranking second to Coke in soft drinks globally, it is the leader in non-carbonated beverages in most markets in which it competes. International growth is the company's driver, with Asia Pacific volume growth especially robust.
PepsiCo and its largest bottler, Pepsi Bottling Group Inc., are purchasing 75 percent of Russia's largest juice producer, JSC Lebedyansky, for $1.4 billion. PepsiCo spent $1.3 billion on acquisitions last year, including Bluebird snacks in New Zealand and Naked Juice in the U.S.
The innovative company is constantly introducing new products, such as its Tropicana Pure Valencia high-end juices, low-sodium Lay's chips and low-calorie G2 Gatorade.
Consensus Wall Street recommendation on PepsiCo shares is a "buy," according to Thomson Financial, consisting of four "strong buys," seven "buys" and four "holds."
Chief Executive Indra Nooyi has become a business celebrity since receiving the top spot in October 2006. She was previously instrumental in strategic development at PepsiCo. Her game plan is innovation around core products, plus inroads into health and wellness products.
Nooyi's 2007 salary was $1.3 million, a 35 percent increase over 2006, according to a filing with the Securities and Exchange Commission. She became board chair in May 2007.
PepsiCo earnings are expected to rise 10 percent this year and 11 percent next year, according to Thomson. The projected five-year annualized increase also is forecast as 11 percent.
Q. Can I expect improvement in my shares of WellPoint Inc.? - M.R., via the Internet
A. The nation's largest health insurer, with 34.8 million members, is suffering from higher costs, lagging enrollment and worsening economic conditions.
More tough medicine:
• It faces a premium reduction in California's Medi-Cal program starting July 1.
• It is leaving the Ohio Covered Families & Children's Medicaid program because it was unable to obtain rates it considered fiscally sound. That reduced its expected enrollment gain this year from 1 million to 800,000.
• New York Attorney General Andrew Cuomo issued subpoenas to WellPoint and 15 other insurers in his investigation of possible consumer fraud.
When WellPoint recently reduced its 2008 earnings outlook, all health-care stocks took a turn for the worse.
Shares of WellPoint (WLP) are down 48 percent this year, following a gain of 11 percent last year.
Fitch Ratings reduced its outlook on the insurer to negative from stable because earnings before interest, taxes, depreciation and amortization are likely to decline significantly and weaken financial stability. But it affirmed its investment-grade ratings.
Standard & Poor's kept its rating at stable, saying the reduced profit outlook didn't alter its opinion on the firm's operating performance. But it said it will revise to negative if operating performance deteriorates.
The consensus recommendation on shares of WellPoint is between a "buy" and a "hold," according to Thomson Financial, consisting of six "strong buys," four "buys" and 12 "holds."
WellPoint still has a solid advantage as the largest licensee of Blue Cross Blue Shield, serving 14 states. WellPoint also acquired WellChoice in 2005 to gain a strong presence in New York and in national accounts.
It has a broad line of products that includes not only risk-based health insurance, but administrative services and specialty products such as vision, dental, prescription drugs and behavioral health coverage. It has a strong balance sheet and one of the lowest medical loss ratios in the industry.
Earnings are expected to increase 5 percent this year compared with the 13 percent projected for the health-care-plan industry. Next year's rise is estimated at 13 percent versus 15 percent industrywide. The projected five-year annualized growth rate of 15 percent compares with 14 percent by its peers.
Q. I want to know what is going on at First Eagle Global Fund, and whether I should keep my money in it. - V.L., via the Internet
A. If past and present count, this is a conservative world-allocation fund any investor should be proud to own. It has done well in recent market turbulence.
The problem is the future.
Longtime manager Jean-Marie Eveillard, who retired in 2004, was called back into service last year after successor and former associate Charles de Vaulx left. The fund gave no explanation for de Vaulx's departure.
Eveillard, 67, is filling in for a year until a successor is named. Although his replacement is expected to continue a value strategy, it is hard for a new investor to get excited about an unknown manager.
First Eagle Global Fund (SGENX) is up 5 percent over the past 12 months and has a three-year annualized return of 13 percent. Both rank in the upper one-third of world-allocation funds.
It was closed to new investors in 2005 but reopened early this year.
"We would not suggest you sell First Eagle Global now, since Eveillard is a great manager," said Bridget Hughes, an analyst with Morningstar Inc. in Chicago. "But think twice about investing, because its future is uncertain and there are other great options."
This contrarian fund selects securities whose assets appear undervalued. It has a larger stock component than most world-allocation funds. Although it favors smaller and midsize stocks, it often buys stakes in large companies.
"Because it is conservative, it lags in rallies, and the cash in the portfolio hurts in headier times," Hughes said. "But since summer, when all the market turbulence began, it has held up well."
Industrial materials represent 24 percent of assets, with financial services and consumer goods other concentrations. Roughly 17 percent of its portfolio is cash. One-fourth of assets are U.S. investments, 16 percent U.K. and Western Europe, 16 percent Japan and the remainder in other regions.
Top holdings include the commodity gold; Switzerland's Pargesa Holding and Nestle SA; U.S. stocks Berkshire Hathaway Inc. "A," Johnson & Johnson, ConocoPhillips and Apache Corp.; and France's Sodexho Alliance SA, Sanofi-Aventis and Wendel.
This 5 percent "load" (sales charge) fund requires a $2,500 minimum initial investment and has a 1.12 percent annual expense ratio.
Q. Now that Dodge & Cox Stock Fund has reopened to new investors, is it worth putting money in? - F.C., via the Internet
A. It was reopened after four years because more investment opportunities arose and its portfolio managers didn't want to sell existing holdings to take advantage of them.
The experienced, nine-member Dodge & Cox equity investment policy committee runs this fund, supported by 20 analysts and 10 research assistants. They follow a disciplined, consistent value strategy.
Because it invests in companies under some sort of cloud, in the past year a number of holdings such as Wachovia Corp., Motorola Inc., WellPoint Inc., and Sprint Nextel Corp. haven't turned around yet and overall performance suffered.
The $56 billion Dodge & Cox Stock Fund (DODGX) is down 13 percent over the past 12 months to rank in the bottom 20 percent of large value funds. Its three-year annualized return of 4 percent places it below the midpoint of its peers.
On the other hand, its 10-year annualized return of 10 percent places it in the top 2 percent of its category.
"You can't expect a fund that's contrarian to be top-notch every single year," said Dan Culloton, analyst with Morningstar Inc. in Chicago. "The keys to this fund are its very experienced management, low expenses and low turnover, making it a good fund to own for the long term."
More short-term pain may be ahead because of fallout from the credit crunch, but short term is not what this fund is all about. Its management team favors mostly large-cap stocks that look inexpensive, especially those with good leadership, industry dominance and growth potential.
Investors should note that Dodge & Cox Stock Fund does have more foreign stocks than many rivals and also has issued large long-term capital gains distributions in the past.
Health care represents 21 percent of portfolio and financial services 14 percent, with other concentrations in technology hardware and industrial materials. Top holdings are Hewlett-Packard Co., Comcast Corp., Wal-Mart Stores Inc., Wachovia, Sanofi-Aventis, Sony Corp., News Corp., Motorola, Matsushita Electric Industrial Co. and Chevron Corp.
This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has an annual expense ratio of 0.52 percent, which is exceptionally low compared with its peers.
Q. Is investing in the Dogs of the Dow a good strategy? - N.V., via the Internet
A. Its record has tailed off.
The Dogs of the Dow is a strategy popularized by Michael O'Higgins in the early 1990s. The investor at the beginning of each year buys the 10 Dow Jones industrial average stocks with the highest dividend yield.
This supposedly reveals stocks undervalued versus their peers. The list is refreshed each year.
The Dogs have beaten the Dow industrials in total return twice in the past five years, slightly in 2003 and in 2006 by more than 10 percentage points. Last year the Dow beat the Dogs by about 5 percentage points.
"The theory is you get paid while you wait, and the stocks are low-priced," said Paul Nolte, investment director with Hinsdale Associates in Hinsdale, Ill. "It is OK for a portion of your portfolio, but it is highly concentrated and not what we recommend to clients."
The 2008 Dogs of the Dow at the beginning of the year were Citigroup, Pfizer, General Motors, Altria, Verizon, AT&T, DuPont, JPMorgan Chase, General Electric and Home Depot. Altria has since been removed from the Dow.
Q. If my home is declining in value, how does this affect my home-equity loan? - M.C., via the Internet
A. You keep paying what you owe on your existing home-equity loan for as long as you continue to own your home or until you pay off the loan.
Although home-equity loans and lines of credit often have repayment periods of 15 years, they can be as short as five or as long as 30 years.
If you sell the home, you'll still owe the loan amousnt. But your profits, if any, from the home sale will determine how much of the home-equity loan can be paid directly from those profits. That's where you would see a difference from a lower home value.
"In these times, it is best that consumers under-obligate themselves and maintain a large cushion," said Catherine Williams, vice president with nonprofit Money Management International in Houston, who noted the growing problem of homeowners holding a combined home-equity loan and mortgage that is larger than their house is actually worth.
A troubling statistic: The percentage of equity Americans have in their homes last year fell below 50 percent for the first time since 1945, according to the Federal Reserve.
Editor's Note: Andrew Leckey answers questions for The Bull & Bear Financial Report 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.
