By Andrew Leckey
Q. What is the outlook for my investment in Liz Claiborne Inc.? - P.V., via the Internet
A. Sales of this famous women's clothing maker have picked up and management says it has become "less melancholy" about the upcoming holiday season. Its inventory is also much lower than a year ago.
Nonetheless, the economy continued to take its toll as it lost $90.5 million in its third quarter. That's why it initiated changes to better control the sale and pricing of its merchandise.
It is pulling its main Liz Claiborne brands out of numerous department stores so they can be solid exclusively at J.C. Penney Co. in fall 2010. It will still design the brands, but they will be produced by J.C. Penney suppliers.
In addition, its Liz Claiborne New York brand designed by Isaac Mizrahi will be sold by the QVC television shopping channel. These shifts will not affect its Juicy Couture, Lucky Brand, Kate Spade and overseas Mexx brands and their stand-alone stores.
Spurred by those moves, shares of Liz Claiborne (LIZ) are up 99 percent this year following declines of 86 percent last year and 53 percent in 2007.
The company hired turnaround firm Alvarez & Marsal in September to review its operations for ways to improve cash flow in the U.S. and Europe, stressing that this does not indicate an initial step toward bankruptcy.
Consensus rating on Liz Claiborne stock is currently "hold," according to Thomson Reuters, consisting of one "buy," five "holds" and one "underperform."
William McComb, who became CEO in 2006, spent 14 years at Johnson & Johnson, where he earned a reputation for enhancing brand names. He has been cutting costs by outsourcing some corporate functions, consolidating distribution centers and closing some stores.
He must improve the company's financial health to properly handle its heavy debt burden. Earlier this year Standard & Poor's Ratings Service lowered its rating on the company two levels to B, from BB-, and said the outlook was negative through year-end.
Earnings are expected to decline 241 percent this year, compared with a 1 percent decline for the textile-apparel clothing industry, according to Thomson Reuters. Next year's projected 101 percent gain compares with the forecast of a 13 percent rise for its peers. The five-year annualized growth rate is expected to be 14 percent versus the forecast of an 11 percent increase industry-wide.
Q. My shares of Aetna Inc. have been disappointing. Please shed some light on prospects. - T.B., via the Internet
A. Health care continues to be a demanding business, even for a company that has worked hard to greatly improve its financial fortunes. Over the past decade the firm has unloaded unprofitable and noncore businesses while improving its profit margins.
Yet the third-largest U.S. health insurer, with 19 million medical members, still faces tough competition from industry leaders WellPoint and UnitedHealth. Each has more than 30 million members and enjoys superior economies of scale.
Pricing competition and the financial implications of health care reform in Washington present the weightiest considerations for the company in its challenging field.
Shares of Aetna (AET) are down 9 percent this year following last year's 51 percent decline.
Aetna's other lines include dental coverage and group life and disability insurance. It is looking to sell its pharmacy benefits management business.
The company recently bought employee assistance program provider Horizon Behavioral Sciences LLC from Psychiatric Solutions Inc. for $70 million in cash. It also joined with pet insurance provider Pets Best Insurance Services to provide discounted rates on pet insurance plans to businesses and chambers of commerce in Connecticut and western Massachusetts.
Ronald Williams became Aetna chairman and CEO in 2006, coming from WellPoint Health Networks. With the likelihood of further consolidation in the health care industry, Aetna is considered a company that could either be a target or could acquire another company.
Because much of the potential downside is already factored into the stock price, the consensus analyst rating of Aetna stock from Wall Street analysts is "buy," according to Thomson Reuters, consisting of seven "strong buys," four "buys," seven "holds" and one "underperform."
With higher-than-expected costs such an issue for concern, the company said it is willing to forgo membership growth if it will improve its operating margins. According to a study of 60 insurers by Aon Consulting, costs for employer health plans are expected to increase 10 percent within the next 12 months due to an aging population, rising costs and growing patient demand for services.
Aetna earnings are expected to decline 27 percent this year versus the 8 percent growth rate predicted for the health care plan industry. Next year's projected 12 percent rise compares to 10 percent expected for its peers. The five-year annualized return forecast is 13 percent, which is one percent lower than the industry-wide projection.
Q. I am confused about my Yahoo Inc. shares. What do you think the possibilities are? - P.V., via the Internet
A. Despite its long-publicized troubles, this Internet giant with operations in more than 30 countries has lately had some kick in its get-along.
Disciplined cost-cutting by CEO Carol Bartz helped it triple its earnings to $186 million in the third quarter. Revenues were down 12 percent, but the company has been seeing some improvement in advertising sales.
Another positive: Four large advertising firms pledged their support for its planned search and advertising partnership with Microsoft Corp. that is currently under review by antitrust regulators.
The controversial 10-year deal would have Microsoft's new Bing search engine power queries on Yahoo's sites. Though Yahoo would get no upfront payment, it would receive 88 percent of the revenue from advertisements generated from those sites.
On the upswing due to that Microsoft potential, Yahoo (YHOO) shares are up 45 percent this year following last year's 48 percent decline. It has plenty of cash for stock buybacks, acquisitions and new technologies or content.
Despite gaining viewers, Yahoo has lost much of its innovative luster in recent years. So it launched a $100 million, 10-country marketing campaign this fall that will run through 2010. It promotes the company's brand and its viability as competition for its more profitable Internet rival Google Inc. in display advertising.
Consensus rating on Yahoo shares is between "buy" and "hold," according to Thomson Financial, consisting of seven "strong buys," eight "buys," 18 "holds" and two "sells."
Bartz joined Yahoo in January following co-founder Jerry Yang's unsuccessful attempt to turn the company around. He remains with the company for his technology expertise.
Former General Electric Co. executive Andrew Siegel was recently hired as new head of mergers and acquisitions to evaluate which businesses to keep and which to sell. The firm has indicated it doesn't plan to sell its 35 percent stake in Yahoo Japan or its 40 percent stake in China's Alibaba Group, the parent of Alibaba.com, because it sees value and long-growth in those holdings.
Earnings are expected to decline 22 percent this year compared with the 2 percent decline expected for the Internet information providers industry. Next year's forecast of a 14 percent gain compares to 12 percent expected industry-wide. The five-year annualized growth rate is projected to be 16 percent versus the 12 percent forecast for its peers.
Q. Is Waddell & Reed Asset Strategy Fund a good investment? - K.C., via the Internet
A. It does its own thing: Management has the flexibility to invest in virtually any asset class, ranging from stocks to bonds to commodities and exchange-traded derivatives.
It sometimes shifts dramatically between asset classes, which, while traditionally considered a risky strategy, has worked well for this fund for more than a decade.
The $3.2 billion Waddell & Reed Asset Strategy "A" (UNASX) is up 27 percent over the past 12 months to rank in the upper one-third of world allocation funds. Its three-year annualized return of 11 percent places it in the top percentile of its peers.
"We recommend this fund, though if either or both of the managers who run it were to leave, we would reconsider," said Michael Herbst, analyst with Morningstar Inc. in Chicago. "The key aspect of this fund is our confidence in its management."
Respected portfolio manager Michael Avery, with more than 30 years of investment experience, has been with the fund since 1997. Ryan Caldwell joined the management team in 2007. They use a top-down, theme-oriented approach to investing while drawing upon the firm's team of more than 70 analysts, portfolio managers and economists.
Global equities and debt, foreign currencies, precious metals, cash and short selling are all put to use at various times. Since this is a world fund, it can include U.S. stocks.
"The key point for investors is that they should expect its shifts between asset classes or into and out of cash," cautioned Herbst. "They must understand that's simply a part of the territory."
One-third of the fund's stocks are in financial services, with other significant concentrations in energy and industrial materials. Among its largest country investments, one-fourth of assets are in the U.S., followed by 19 percent in China and 5 percent each in India, Taiwan and the United Kingdom.
Top holdings have included gold bullion, Industrial and Commercial Bank of China, Taiwan Semiconductor Manufacturing, China Life Insurance Co., Monsanto, Qualcomm, the United Kingdom's Standard Chartered Plc., China Shenhua Energy Company Ltd., France's Total SA and Visa.
This 5.75 percent "load" (sales charge) fund requires a $500 minimum initial investment and has a 1.20 percent expense ratio.
Q. Will my shares of Morgan Stanley Value Fund be doing better? - B.C., via the Internet
A. It is run by an experienced team of contrarians that favors stocks selling cheaply and tries to take advantage of troubled situations whenever it can.
Sometimes that team does, however, move early on stocks, which means it takes a while for the investment to work out. Its sector and company bets can also increase its volatility somewhat.
The $114 million Morgan Stanley Value Fund "A" (VLUAX) is up 32 percent over the past 12 months to rank in the top one-tenth of large value funds. The three-year annualized decline of 5 percent is in the top one-third of its peers.
Team managers Jason Leder and Kevin Holt have managed the similar fund Van Kampen Comstock Fund (ACSTX) for over a decade, while Devin Armstrong came on in 2007. The managers have meaningful personal investments in these funds.
Because of all this continuity, the loss of Morgan Stanley Value Fund's lead manager, Robert Baker, to retirement in July didn't signal a change in philosophy. The fund most recently cut back on cyclical stocks and, expecting a slower growth environment, moved into consumer staples such as Bristol-Myers Squibb.
"We like the team, we like the strategy, we like the results," said Greg Carlson, analyst with Morningstar Inc. "It is willing to look different from its peers, which can lead to streaky returns, but over the long term the record is very good."
Nonetheless, Carlson considers Van Kampen Comstock to be a better fund than this one because it is essentially the same, but with a cheaper annual expense ratio of 0.84 percent rather than this fund's 1.04 percent.
Morgan Stanley Investment Management has positioned its two fund brands Van Kampen and Morgan differently. The former is presented as offering basic choices for average investors and the latter as an upscale line with more specialized strategies. Morningstar believes that there is confusing redundancy and the company should do more to serve shareholders rather than push sales.
Financial services represents 20 percent of the Morgan Stanley Value Fund portfolio, with consumer goods, consumer services and media its other significant concentrations. The top stocks were recently Chubb, Viacom, Comcast, International Paper, Verizon Communications, eBay, Cadbury Plc., JPMorgan Chase, Time Warner and Schering-Plough.
This 5.25 percent "load" (sales charge) fund requires a $1,000 minimum initial investment.
Q. What investments are tax-exempt? - T.L., via the Internet
A. The higher your individual tax bracket, the greater the benefit from tax-exempt investments.
One popular choice, the municipal bond, is federally tax-exempt, with some also exempt from state taxes, depending on the state. Treasury securities and U.S. Savings Bonds are subject to federal tax, but not to state and local tax. However, interest earnings on Savings Bonds may be excluded from federal income tax when the bonds are used to finance education, with some restrictions.
"Usually if you're in a tax bracket of 20 to 25 percent or higher, the math works out more favorably for tax-exempt securities," said Mark Balasa, certified financial planner and co-president of Balasa Diverno Foltz LLC in Schaumburg, Ill.
For example, a taxpayer in the 28 percent bracket would need a taxable return of about 6.94 percent to match a tax-free yield of 5 percent. Someone in the 35 percent bracket would need a 7.69 percent return. That isn't taking into account state and local taxes.
"You take the return on the tax-exempt investment, and then you divide it by one minus your tax bracket," explained Balasa. "That gives you the tax-equivalent yield so you can compare the two and choose."
Q. What costs involved in my investing are deductible? Are software and investment books deductible? - A.F., via the Internet
A. Expenses related to the production of income generally are deductible, including expenses related to investments.
To reach the threshold for deductibility, however, the expenses must be 2 percent of your adjusted gross income. They're taken as miscellaneous itemized deductions on Schedule A of Form 1040.
"This includes a broad spectrum and has to pass a reasonability test," said Mitchell Kauffman, certified financial planner with Kauffman Wealth Services, Pasadena, Calif. "Examples are a book on investing, software to help you invest, financial magazine subscriptions and fees to an investment advisor or accountant."
Keep good documentation of these expenses in case of an audit, Kauffman added.
If you earned $60,000 annually, 2 percent of $60,000 is $1,200, and only those expenses added together that exceed $1,200 would count, Kauffman noted. If someone spent $800 on these items, nothing would count. If someone spent $1,500, then only $300 would count, he said.
Editor's Note: Andrew Leckey answers questions for The Bull & Bear readers only through the column. Address inquiries to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, AZ 85004-1248, or by e-mail at andrewinv@aol.com.
