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Q. I hear good things about Wells Fargo & Co. and wonder if its stock is ready for a comeback. - M.K., via the Internet
A. The fourth-largest U.S. bank, known for its strong customer relationships, is more optimistic about the economic future than are many of its peers. It has said it sees signs of recovery in its loan business, with loan defaults that are close to a peak or that may have already peaked.
It made fewer home loans and its bad mortgage loans were up in its most recent quarter compared to the prior quarter. However, it received higher fee income from mortgage originations.
In a bullish move, it has announced plans to aggressively hire new financial advisers for its brokerage unit, which is the combination of A.G. Edwards, Wachovia and Wells Fargo brokerages.
Wells Fargo (WFC) shares are up 8 percent this year following last year's 7 percent decline. The bank reported a surprising $394 million profit in its fourth quarter after paying preferred dividends, which was stellar in comparison to its embattled rivals.
This nationwide bank that has been a leader in online banking has more than $1.2 trillion in assets and more than 6,000 offices. It doubled its size with the acquisition of Wachovia. Warren Buffett's Berkshire Hathaway is a shareholder in the bank.
The consensus analyst opinion on shares of Wells Fargo is a weak "buy," according to Thomson Reuters, consisting of six "strong buys," eight "buys," nine "holds," two "underperforms" and three "sells."
Wells Fargo repaid its federal TARP money and has a solid track record of boosting profits from its existing customer base by marketing packages of financial products. About one-fourth of its business consists of non-interest-bearing accounts, making it an industry leader in that highly desirable category.
CEO John Stumpf, who has been with the company since 1982, added the role of chairman after Dick Kovacevich retired at yearend 2009. Despite capital ratios that aren't as strong as some of its peers, the bank has earnings power and is positioned to significantly increase profits as the economy improves. Near-term, however, potential losses on commercial real estate are a concern of not only Wells Fargo but the entire banking industry.
Wells Fargo earnings are expected to increase 7 percent this year and 51 percent next year. The five-year annualized growth rate is projected to be 12 percent, versus 1 percent for the money center bank industry.
Q. I would like to know the prospects for Oracle Corp. in light of the Sun Microsystems acquisition. - P.V., via the Internet
A. The No. 1 provider of database software is cast in the bold image of its billionaire cofounder and CEO Larry Ellison, whose BMW Oracle international sailing team recently won the America's Cup competition.
Ellison, who has said "the America's Cup is like running Oracle" because of the engineers and manufacturing behind both, is now taking on the challenge of his $7.4 billion acquisition of Sun Microsystems.
He has confidently predicted that the money-losing computer server business will soon turn a profit, shaking off numerous critics who say he should not have expanded into hardware.
The goal is to invest in new products and incorporate Sun's high-end systems into a premium all-in-one computer system. It has begun to sell directly to Sun's top 4,000 customers while increasing its research and development efforts.
Aggressive Oracle has been built on acquisitions, including more than 60 companies purchased in the last five years.
Shares of Oracle (ORCL) have been flat this year following last year's 39 percent rise. Earnings in its most recent quarter were up 13 percent and ahead of forecasts as companies became less reluctant to spend money on technology.
Oracle has more than 40 percent of the database market, far ahead of IBM and Microsoft. It sells a wide range of enterprise solutions, including middleware and applications, as it aims to be a one-stop destination for any company looking for enterprise software. Software license updates and product support provide nearly half of the revenues of the company.
The consensus analyst recommendation on Oracle is "buy," according to Thomson Reuters, consisting of nine "strong buys," 16 "buys" and eight "holds."
This profitable California-based company is in strong financial shape with plenty of cash to cover its debt. Ellison, who co-founded it in 1977, owns nearly one-fourth of the company. Oracle does, however, face fierce competition and there's also the possibility that smaller competitors might pop up with something new that could affect its business. The results of buying Sun still remain to be seen.
Earnings are expected to increase by 10 percent in the current fiscal year ending in May and rise 18 percent the following fiscal year. The five-year annualized growth rate for the company is forecast as 14 percent versus 13 percent predicted for the application software industry.
Q. Please comment on Heartland Value Fund. Is it worth putting money in? - D.B., via the Internet
A. This fund for long-term investors focuses on undervalued small- and micro-cap companies.
It can invest in any industry and most recently has favored bargain-priced healthcare companies that were whacked by the threat of health care reform. It expects to gain from industry consolidation in the coming years.
The $1.2 billion Heartland Value Fund is up 75 percent over the past 12 months to rank in the upper one-third of small value funds. Its three-year annualized decline of 8 percent places it in the lower half of its peers, while its five-year annualized return of 2 percent puts it above the mid-point.
"This is not a fund that is going to blow up, though because of its concentrated and contrarian approach it can lag the market for certain periods," said Ryan Leggio, analyst with Morningstar Inc. in Chicago. "It is for long-term investors and, because it is very small-cap oriented, it should be a small portion of a diversified portfolio."
Bill Nasgovitz is an experienced manager who has run Heartland Value Fund since 1984. Bradford Evans joined him in 2004 and his son Will Nasgovitz was added to the team early last year.
They seek financially-sound companies with low prices on a historical basis and the potential for improvement. They also do technical analysis to determine if it is the right time to buy a company's stock. The quality of a company's management and leadership in its industry are also heavily weighted. Many of the firms have little or no debt.
"In our small-cap category, this fund has been average," said Leggio. "There has been better performance from funds such as the Heartland Value Plus (HRVIX) that focuses on small companies paying dividends."
One-fourth of portfolio is in health care, with other concentrations in industrial materials and consumer goods. Top stocks were recently Analogic, InterDigital, Hollys Automation Technologies, Force Protection, Basic Sanitation Co. of the State of Sao Paulo, BioScrip, Accuray, Swift Energy, Rosetta Resources and Sherritt International.
This "no-load" (no sales charge) fund requires a $1,000 minimum initial investment and has a reasonable annual expense ratio of 1.20 percent.
Q. Should I buy shares of Alger MidCap Growth Fund? It was recommended to me. - B.M., via the Internet
A. This aggressive growth fund targeting mid-cap stocks has had its ups and downs. It was, for example, up 32 percent in 2007, down 58 percent in 2008 and up 51 percent in 2009, indicating that volatility seems to be imbedded in its DNA.
As a result, when you buy into this fund can even make a big difference.
The $344 million Alger MidCap Growth Fund "A" (AMGAX) was up 65 percent over the past 12 months to rank in the top one-fifth of mid-cap growth funds. Its three-year annualized decline of 9 percent places it in the lowest one-fifth of its peers.
"Because of its 'feast or famine' type of strategy that does really well in high-growth markets and poorly in challenged markets, I would not recommend Alger MidCap Growth Fund," said Jonathan Rahbar, analyst with Morningstar Inc. in Chicago.
Portfolio manager Dan Chung seeks firms with solid balance sheets and rapid growth. A Harvard law graduate and former technology analyst, Chung is CEO and CIO of Fred Alger Management Co. and co-manager of the Alger LargeCap Growth Fund and Alger Balanced Fund. He became the fund's manager in September 2001 when its former managers perished in the World Trade Center attack.
He is confident enough to cut or add to positions as stock prices fluctuate and his portfolio turnover is high. He doesn't pay too much attention to traditional valuation measures but rather sets price targets based on his own cash-flow model.
"The fund tends to have some concentration in technology and healthcare, but on the whole it is well-diversified," said Rahbar, noting that Alger has a large research team of analysts who delve deeply into stocks for its funds.
Consumer services and health care each represent about 16 percent of the portfolio, with other concentrations in industrial materials and financial services. Top holdings were recently SPX, Yamana Gold, Skyworks Solutions, eBay, Cliffs Natural Resources, Apple, Marvell Technology Group, Nexen, Select Medical Holdings and Cognizant Technology Solutions.
This 5.75 percent "load" (sales charge) fund requires a $1,000 minimum initial investment and has an annual expense ratio of 1.49 percent.
Q. It seems like a lot of companies are buying back their stock. I'd like an explanation of this. - M.B., via the Internet
A. What's actually occurred this year is a large number of authorizations by companies to buy back their stock, following a year in which buybacks hit an all-time low.
The fact they've authorized the buybacks doesn't necessarily mean they will follow through and historically they often don't. Thus far, there haven't been major stock buybacks and whether or not there will be depends on the overall stock market.
"A stock buyback reduces the number of shares outstanding in the market and increases the earnings per share," explained Howard Silverblatt, senior analyst with Standard & Poor's in New York. "And on a short-term basis it provides price support."
Companies buy their stock to pay back shareholders. Stock buyback activity was strong between 2004 and 2007, but no one expects it to reach those levels again anytime soon.
"While companies are authorizing stock buybacks, we're seeing even more activity in dividends," concluded Silverblatt. "Dividends are an even stronger statement by the company, in that you're getting cash you never have to give back and you can expect it again next quarter."
Q. What are the tax benefits of donating stock to charity? - I.K., via the Internet
A. Investment guru Warren Buffett is a fine example of a savvy philanthropist who has funded charitable gifts in large part with stock in his Berkshire Hathaway firm. Charities, hospitals, schools and other non-profit organizations accept stock as a gift or donation.
The first benefit is the tax deduction for the donation of the stock. Second, if there is gain in the stock and it has been held for more than a year, you can avoid tax on the stock's gain.
"The double benefit is the deduction plus the avoidance of gain, though to avoid that gain you must have held the stock more than one year," explained Mike Busch, certified financial planner with Vogel Financial Advisors in Dallas.
If you have had the stock less than a year, you can only deduct the amount of your investment, not the current market value, he said. Basically, you can only deduct what you initially paid for the shares.
"If you have a loss, you'd be better off selling the stock, taking the capital loss for yourself and then donating the proceeds from the sale," concluded Busch.
