Q. What are prospects for my shares of E-Trade Financial Corp.? - M.L., via the Internet
A. Even though a talking baby is the voice of this online discount brokerage in its commercials, the financial problems stemming from previous risk-taking are hardly child's play.
On the plus side, it has added new accounts, losses have narrowed and loan delinquencies have flattened.
Yet low trading volume and low interest rates have prompted E-Trade to lower its commissions and fee structure. It is refocusing on its core online brokerage business as it tries to recover from a disastrous bet on mortgage securities that resulted in it having to sell assets and raise capital.
The company remains vulnerable should the economy or markets backslide. The prognosis for this speculative holding is that it will either get its business back on track or sell itself to another financial services company. The latter possibility is behind some of the stock price jumps of recent months.
Shares of E-Trade (ETFC) are down 3 percent this year after last year's 53 percent rise. It is seeking shareholder approval for a 1-for-10 reverse stock split that will reduce the number of shares in order to increase the price per share. It does not pay a dividend.
After months of searching, E-Trade recently named former Citigroup Inc. executive Steven Freiberg as its new CEO, signing the 53-year-old to a four-year contract. Freiberg spent 30 years at Citigroup and was in charge of the global consumer group.
Consensus opinion on shares of E-Trade is between "buy" and "hold," according to Thomson Reuters, consisting of three "strong buys," two "buys," nine "holds" and one "underperform."
E-Trade offers sweep, checking and savings products to its brokerage clients. It has about 4.5 million client accounts and $26 billion in deposits. Citadel, as E-Trade's largest debt holder and equity holder, exerts considerable power over the company. While E-Trade is no longer in financial distress thanks to the injection of new capital, cash flows could be uneven as it shifts its mix of investments.
Earnings are expected to increase 98 percent this year compared to the 62 percent rise forecast for the national investment brokerage industry, according to Thomson Reuters. Next year's projected gain is 367 percent versus 24 percent expected for its peers. The expected five-year annualized decline of 27 percent compares to an 11 percent gain forecast industrywide.
Baby controversy: Because a "milkaholic" boyfriend-stealing baby is named Lindsay in an E-Trade commercial, actress Lindsay Lohan sued the firm for $100 million in damages. E-Trade says her claim is without merit.
Q. I'm a long-time Hewlett-Packard Co. shareholder. Is this stock ready for a strong run? - P.R., via the Internet
A. The global reach of this famous information technology firm is powerful, with its personal computers, printers, servers and services likely to post gains in an economic revival.
It has been aggressive in developing and distributing complex new technologies that expand beyond the more limited potential of PC and printer businesses that have become commoditized.
The company's services business, expanded through the acquisition of Electronic Data Services in 2008, is going after a profit center that IBM has dominated. The company's goal is to wrap its hardware in a profitable bundle of software and services.
Shares of Hewlett-Packard (HPQ) are up 3 percent this year following last year's 43 percent increase. The company earned $2.25 billion in its first fiscal quarter, up from $1.86 billion a year earlier, on cost cuts and rising sales.
It is hyping its upcoming slate computer with the assertion that it will run "the complete Internet" better than Apple's iPad. While H-P notebook computers, desktop computers and servers have bounced back from last year's weak results, the company faces competition from strong rivals such as Dell, Cisco and Oracle.
Sales of H-P hand-held products, including its iPaq smartphone, have been lackluster. That has led industry analysts to wonder whether H-P has a serious future in smartphones, which many believe are destined to become a larger business than laptops.
The consensus analyst recommendation on Hewlett-Packard shares is between "strong buy" and "buy," according to Thomson Reuters, consisting of 14 "strong buys," 13 "buys" and five "holds."
Mark Hurd, who became CEO in 2005 and added the title of chairman in 2006, aggressively engineered the acquisitions of EDS and 3Com. He is backed by a veteran management team at a firm whose financial health is strong, with plenty of cash flow and a manageable debt load.
Earnings for the fiscal year ending in October are expected to increase 15 percent and rise another 10 percent the following fiscal year. The five-year annualized return is projected to be 13 percent, about in line with the diversified computer systems industry.
H-P recently apologized in China for faulty graphics components in some laptops sold there and offered extended warranties after Chinese authorities launched an investigation of the problems.
Q. I have concerns about my shares of Sanofi-Aventis. Do you think things are looking up? - P.Z., via the Internet
A. This French pharmaceutical firm hopes to expand its business beyond drugs, which can lose their popularity with age and run up against generics and new rivals.
Upcoming patent expirations for some of its top-selling drugs through 2015 include the anti-clotting treatment Plavix.
That's why it recently agreed to pay $1.9 billion to buy consumer health-care company Chattem Inc., the maker of products such as Selsun Blue shampoo, Gold Bond skin care products, Cortizone-10 and Icy Hot pain relief medicine. The deal gives it a strong entrance into the U.S. over-the-counter marketplace.
CEO Christopher Viehbacher has said the company is likely to make more consumer health-care acquisitions, using its strong cash flow that is also used for share buybacks. Since coming on board from GlaxoSmithKline Plc in late 2008, Viehbacher has also cut costs and streamlined research efforts.
Sanofi-Aventis (SNY) shares are down 3 percent this year following last year's 27 percent rise. The company had a net profit of $23.4 million in its most recent quarter.
Its human vaccines business has had strong sales growth thanks to flu drug sales, while sales of its diabetes drug Lantis are up, as well. Europe represents about 45 percent of revenues and the U.S., 30 percent, with its fastest-growing markets located outside the U.S.
The consensus rating on Sanofi-Aventis stock by Wall Street analysts is "hold," according to Thomson Reuters.
The company has combined its Merial animal health business with Merck & Co.'s Intervet/Schering-Plough unit. The resulting joint venture commands 29 percent of the $19 billion annual global market for medicines for pets and livestock.
Sanofi-Aventis develops and markets pharmaceuticals, with a concentration in oncology, cardiovascular disease, central nervous system disorders, diabetes and vaccines. It has a strong group of late-stage pipeline products that should help it overcome patent losses, but reducing uncertainty by expanding into consumer health-care products is nonetheless a prudent game plan.
French oil company Total and cosmetics firm L'Oreal have a combined ownership of 17 percent of Sanofi-Aventis, but they don't consider it to be in line with their strategic businesses. They've attempted to sell off their portion in the past.
Earnings are expected to decline 75 percent this year and go down another 1 percent next year. The five-year annualized growth rate is projected to be 1.4 percent.
Q. Please give your opinion of The Kroger Co. stock. I wonder how well it's doing against all the competition. - B.B., via the Internet
A. The largest traditional U.S. grocery chain by revenues must focus on pleasing price-conscious consumers during this demanding time in which the economy remains uncertain.
Deep discounts and promotions to fend off intense competition take a toll on its bottom line. In addition, a decline in food prices has made it difficult to pass along increased packaging and labor costs.
Kroger (KR) shares are up 9 percent this year following last year's 21 percent decline. Fourth-quarter earnings fell a disappointing 27 percent and, although Kroger executives say they see hopeful signs in divisions such as its jewelry stores, they expect a slow and uncertain recovery.
The Kroger empire is extensive, providing economies of scale and the ability to demand the best prices from suppliers. The firm is No. 1 or 2 in 39 of its 42 major markets. It has increasingly been tailoring its stores to local preferences and emphasizing its strong private-label brands, which now total more than 14,000 items.
Kroger operates about 2,500 supermarkets and multi-department stores in 31 states under two dozen different names that include Kroger, City Market, Dillons, King Soopers, Fry's, Pay Less and Fred Meyer.
It also has nearly 900 supermarket gasoline stations, 40 food-processing plants and, under five different banners, operates about 800 convenience stores in 16 states. Its nearly 400 fine jewelry stores in 35 states are operated under the Barclay, Fox, Littman and Fred Meyer names.
The analyst consensus opinion of Kroger stock is "buy," according to Thomson Reuters, consisting of seven "strong buys," six "buys," seven "holds" and one "underperform."
Big-time competition seems to be everywhere and growing. Drug store chain Walgreen is now offering fresh foods and prepared meals in thousands of its stores nationwide and has its own private-label brand. This follows the lead of discounters such as Wal-Mart, Target and Costco, which have been cutting into the market share of traditional grocers such as Kroger, Safeway and Supervalu.
David Dillon, the firm's former chief operating officer, has been CEO since 2003 and chairman since 2004.
Earnings are expected to increase 5 percent in the fiscal year ending next January and 13 percent the following fiscal year. The five-year annualized growth rate is projected to be 9 percent versus the 12 percent growth rate forecast for the grocery stores industry.
Q. I would like your take on Parnassus Small-Cap Fund. - P.J., via the Internet
A. This strong-performing fund launched in 2005 is run by Jerome Dodson, the founder of Parnassus Investments and a veteran of socially responsible investing.
Espousing strong investment and moral philosophies, Dodson invests a considerable amount of his own money in the funds. He believes that, given a choice, investors will favor companies that positively impact the world.
Some of his social screens include treatment of employees, workplace diversity, environmental responsibility and support for community. He won't invest in companies involved in alcohol, tobacco, weapons or nuclear power.
The $173 million Parnassus Small-Cap Fund (PARSX) is up 64 percent over the past 12 months to rank in the top one-third of small growth and value funds. Its three-year annualized return of 5 percent places it in the top 2 percent of its peers.
"While Parnassus Small-Cap Fund held up a lot better than most of its peers in 2008, it also did well in 2009 when a lot of funds didn't," said Katie Rushkewicz, analyst with Morningstar Inc. in Chicago. "It offers good downside protection and management that can do well in different market environments."
With 25 years of investing experience, Dodson consistently looks for firms with a strong market niche, good five-year intrinsic value and low price. Dodson usually holds positions for three years. The fund has reasonable expenses; he is supported by seven analysts and a trader.
"Since the fund has a small-cap focus, at times small caps can be out of favor, so it should be a supporting player in an individual's portfolio," said Rushkewicz. "It's not always going to be at the top of the pack, but over the long term should be a good investment."
Industrial materials companies represent one-fifth of the fund's holdings, with other significant concentrations in hardware, telecommunications and business services. Top holdings were recently Ciena, Administaff, Bridgepoint Educaiton, Teleflex, Toll Brothers, Quicksilver Resources, Gen-Probe, VeriSign, Northwest Natural Gas and Nordson.
This "no-load" (no sales charge) fund requires a $2,000 minimum initial investment and has an annual expense ratio of 1.20 percent.
Q. Is Turner Small Cap Growth Fund worth investing in? - B.R., via the Internet
A. This fund is aggressive and volatile, with a strong emphasis on earnings momentum in its stock selections.
Which means that, unless you're a daredevil at heart, it should only be considered for a small portion of your personal portfolio. It will fly high in growth-oriented rallies, but becomes vulnerable during value-driven market periods.
The $286 million Turner Small Cap Growth Fund (TSCEX) is up 63 percent over the past 12 months and has a three-year annualized decline of just under 2 percent. Both results rank in the top one-third of small growth funds.
"We like Turner Small Cap Growth because its managers are experienced, have worked together for a long time and are backed by a stable and experienced team of analysts," said Sonya Morris, analyst with Morningstar Inc. in Chicago. "But we recommend it primarily for investors seeking to add a little spice to their portfolios, since those looking for stability should look elsewhere."
Lead manager Bill McVail, on board since 1998, previously ran BlackRock Small Cap Growth Fund with success and is an expert in consumer stocks. Jason Schrotberger, who also covers the consumer sector, joined him in 2002 and Rick Wetmore, who follows financial stocks, was added in 2007. They are aided by 23 sector analysts.
The fund buys rapidly-growing firms based on quantitative and qualitative factors, placing less emphasis on stock price than some competitors do. Despite some short-term swings along the way, its approach is consistent with an emphasis on fundamental research. Individual positions are limited to 2 percent of assets and it does not make large sector bets.
Health care at 21 percent of portfolio and hardware at 16 percent represent the largest concentrations in the fund. Top holdings were recently Atheros Communications, United Therapeutics, Tenet Healthcare, Plexus, Human Genome Sciences, Teradyne, Emergency Medical Services, PMC-Sierra, NetLogic Microsystems and CyberSource.
This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has an annual expense ratio of 1.25 percent.
Turner Investment Partners, which is based in Berwyn, Pa., and manages more than $17 billion in equity investments for institutions and individuals, has a reputation of being a shareholder-friendly firm.
Q. As a shareholder in Fidelity Magellan for many years, I'd like to know what I can expect over the next decade. - V.M., via the Internet
A. With $25 billion in assets, this flagship fund has declined from its peak of $110 billion a decade ago and continues to suffer outflows.
It is a flexible fund that allows portfolio manager Harry Lange to actively pursue growth wherever he can find it, which at times can result in an erratic ride.
Fidelity Magellan is up 60 percent over the past 12 months to rank in the top one-fifth of large growth funds. Its three-year annualized decline of 7 percent places it in the lowest one-fifth of its peers.
"I have a 'hold' rating on Magellan Fund right now because, while it's not a bad choice for anyone, there are better Fidelity large-cap growth funds," said Jack Bowers, editor of the independent Fidelity Monitor (www.fidelitymonitor.com) in Rocklin, CA. "For example, Fidelity Blue Chip Growth Fund has more tech stocks and is a pure play on growth stocks."
Lange, who has been broadening the fund's holdings in order to spread out its risk, spent a decade running other Fidelity funds before taking over Fidelity Magellan in 2005.
His portfolio of up to 300 names focuses on fast-growing companies that are benefiting from solid trends and don't cost too much. They are often from traditional growth sectors. He's backed by Fidelity's enormous research group. He has more than $1 million of his personal money in the fund, signifying his goals are in line with those of other shareholders.
"Lange, who has roots with Fidelity in the technology sector, has understandably included some well-known tech names in the portfolio," said Bowers. "You have to give him credit, in that Magellan was kind of a 'closet' index fund and he instead has made heavy bets and staked his claim."
Industrial materials represent about 17 percent of the fund's portfolio, with other concentrations in hardware, financial services and telecommunications. Its largest holdings were recently Applied Materials, Corning, Nokia, Staples, Medco Health Solutions, Newmont Mining, Apple, Occidental Petroleum, Goldcorp and Chesapeake Energy.
This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has an annual expense ratio of 0.71 percent.
Q. Please settle this disagreement: How much debt should a person have relative to income? What do experts say? - H.C., via the Internet
A. The question of how much debt is appropriate has become a common discussion point following the financial meltdown that threw family budgets into disarray.
A general rule of thumb among financial planners is that you should not permit your non-mortgage debt to consume more than 20 percent of your net income. Car payments can usurp quite a bit of that amount.
In addition, 28 to 33 percent of your pay would typically go toward your mortgage - which includes taxes, insurance, interest and principal.
"That means you're committing about half your income to house payment and debt service," explained Catherine Williams, vice president of financial literacy for the non-profit Money Management International counseling service in Houston. "There's nothing wrong with saying you'll stretch to get a bigger house, but that will also likely mean an older car in the driveway."
While this is a general guideline used widely in the personal finance field, you know your financial situation best and other implications that should be taken into account as you plot a debt strategy.
Q. Does the old rule of thumb still apply in which you subtract your age from 100 and that is what percentage of your portfolio you should have in stocks? - M.R., via the Internet
A. It may still be a logical place to start but is not the end point.
"The problem right now is that, with bond yields so low, that rule of thumb is challenging to a lot of people," observed Mark Balasa, certified financial planner and CPA with Balasa Dinverno Foltz & Hoffman financial advisors, Schaumburg, Ill. "Sometimes you must modify a rule of thumb to take into account realities."
He recommends running a cash flow projection for retirement using one of the many calculators available online. This will tell you how much you'll need in retirement and what you must do to get there, which should help you determine stock and bond mix.
"If you're short of your goal, you can cover that gap by saving more, spending less, working longer or making your portfolio more aggressive by holding more stocks," said Balasa. "If you have more than your goal, the opposite is true and you can have less in stock."
Q. What happens when a company does a reverse stock split? Is it a bad sign? - T.J., via the Internet
A. It isn't an especially good sign, since it means the company is going out of its way to try to boost its stock price to attract new and institutional investors.
The firm may believe it needs to enact a reverse split because its stock price has fallen too low to appear viable or that it must avoid being de-listed on a stock exchange.
Many institutional investors and mutual funds have rules against purchasing a stock priced below a minimum level. A number of embattled financial firms, for example, have enacted reverse splits over the past year.
In a 1-for-2 reverse stock split, you receive one share for every two that you own. So your two $25 stocks become one $50 stock.
"From a value perspective, nothing changes in terms of what you own," pointed out Paul Nolte, managing director of Dearborn Partners in Chicago.
A company's board of directors may declare stock splits without shareholder approval. The reverse split is the opposite of a more typical 2-for-1 stock split, in which you receive two shares for every one you own because the company is trying to make its shares more affordable.
Q. I have some very old stock certificates and I am not sure if these companies even exist anymore. How can I find out of they are worth anything? -T.H., via the Internet
A. While the vast majority of old certificates found in attics and desk drawers are worthless, some do have financial value. There may even be historic or artistic value that makes them collectible.
Start on the Internet to see if you can find out what happened to the company. Next, check with your stockbroker. You can also contact the transfer agent on the back of the certificate, if it still exists, and contact the secretary of state's office in the state where the firm was incorporated.
Books in public libraries such as Moody's Industrial Manual, the Robert D. Fisher Manual of Valuable & Worthless Securities, the National Stock Summary and the Financial Stock Guide Service could help.
For a fee of $39.95 per company, Scripophily.com (888-786-2576) will research your certificate to see if it has value.
"If we can't find out what happened to the company, we don't charge you anything," said Bob Kerstein, CEO of Scripophily.com, Fairfax, VA. "We find out what happened to it about 90 percent of the time."
Editor's Note: Andrew Leckey answers question for Bull & Bear readers only through the column. Address inquiries to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, AZ 85004 or by E-mail at andrewinv@aol.com.
