The Malcolm Berko Blog

Choose a seasoned money manager who’s worth his salt

Dear Mr. Berko: What is the difference between a money manager and a
broker? Which is better to have? And how do I know if I need a money
manager or a stockbroker?

- B.L., Oklahoma City

Dear B.L.: Too many brokers employed by mega-firms – Dean
Witter, Smith Barney, Merrill Lynch, Wells Fargo, etc. – lack
the knowledge, years of experience and good judgment to provide
retired folks, soon to be retired folks or long-term investors with
good judgment.

There are too many average brokers who offer average advice! But you
need more than just average advice from an average broker, who makes
money only when he sells you things, then later proceeds to sell the
things he sold you.

You should consider a professional money manager who is a registered
investment adviser and a certified financial planner. A professional
money manager will manage your portfolio to meet jointly established
goals, while most brokers just recommend stocks or load-funds because
they may look good. Brokers and professional money managers serve two
different worlds: one is transaction-based only, while the other is
always concerned with your goals and the value of your portfolio.

A money manager is your private, personal consultant, whose priority
is maintaining your financial health and to guide you in meeting your
long-term objectives. Together, with your input, you will establish
and build investment goals for short-term, medium-term and long-term
performance. Money managers assess risks and then manage them based
on a written agreement (which you must approve). They constantly
evaluate your account, seek ways to improve and guide performance
within the parameters you’ve jointly established; they invest
in sectors and they post easy-to-understand quarterly performance
reports. Money managers look at your account panoramically and in 3-D
and charge an annual management fee based on the size of your
account.

Brokers don’t look at the entire picture – their view
is microscopic while their advice and commitment is episodic. They
search for a stock that is undervalued, or a high growth, mine your
account for something to sell, then ring you with that
recommendation. They charge swell commissions, which are needed by
their firms to pay for a bloated staff of people in New York and
around the world.

Some investors don’t need a money manager because they have
the time, confidence, research capability, knowledge and good
judgment to manage their portfolio, so they use a discount broker.
But if you can’t read a balance sheet or income statement or
measure risks, or if you don’t know how to position your
account against inflation, rising interest rates, a declining dollar
or a volatile market, then you should consider a money manager.

If you require help selecting the right no-load fund, the proper
equity for income or for moderate growth or locating and recognizing
the right corporate bonds, TIPS, preferred issues, etc., then you
must employ a money manager.

But before you select a money manager, check his/her disciplinary
record with the proper regulatory authority. Meanwhile, the money
manager should have you complete a client profile; he should send you
a list of client references as well as his ADV, which is filed with
the regulators.

Address your financial questions to Malcolm Berko[0], P.O. Box 8303,
Largo, FL 33775 or e-mail him at mjberko@yahoo.com

Headline: Is the greenback rising or falling?

Dear Mr. Berko[0]: I think the dollar is ready to increase in value in
the world scene. But there are a growing number of people who think
that the dollar will continue falling and the Dow Jones will soon
begin to fall with the dollar. Could you explain their thinking in
language a dummy like me can understand? And then could you tell me
how to invest to make money if the dollar begins to recover in the
world market? I know this is a difficult question to answer, but I
would appreciate your usually clear and no-nonsense answer.

- M.S., Jonesboro, Ark.

Dear M.S.: Al Greenspan, appointed by Ronald Regan, has been rightly
criticized for keeping interest rates too low for too long between
2000 and 2006. Greenspan’s low interest rates and very easy
money policies created our asset bubble that took the Dow from 14,000
to 7,000 and in the process created our current epochal financial
mess. Ready, plentiful and cheap money allowed buyers to effortlessly
compete with one another in their manic drive to accumulate assets.
This forced prices to disconnect from historical values and soar
higher in a self-perpetuating cycle fueled by performance anxiety and
a fear of being left behind holding the short end of the stick.

Well, we’re doing the same thing again. The trillions of
dollars flooding the economy are causing investors to rationalize the
irrational. The goal of the Fed’s money stampede is to inflate
the prices of stocks, bonds and housing, but in the process has
created an enormous gulf between the perception of value and stock
market reality. And I’m certain as Satan that the Fed’s
goal of asset-price inflation won’t improve the job market or
consumer confidence and won’t encourage consumers to spend or
other consumers to spend more. And many professionals sense a bubble
forming in bond prices, gold and non-dollar assets, which could
puncture stock prices.

This cheap, easy money has encouraged public corporations to issue
new bonds, buy competitors and raise debt levels to repurchase their
stock. The government’s balance sheet, which, in 2008, posted
$830 billion in new debt, now reports $2.6 trillion in new debt. And
the additional trillions of new debt from the health-care bill risk a
credit downgrade on treasuries from Moody’s or Standard &
Poor’s. And it portends a major dose of hyperinflation. Unless
there’s a major intervention by the Fed, plus the necessary
help of the G-20 Nations, then the dollar may continue to flounder
and perhaps founder.

But, if you think the dollar is going to recover – and I hope
you are right – then you could short gold, oil or silver
(often called the “poor man’s gold”), or some of
the mining stocks. And if their prices fall – and I hope they
do – then you can buy them back at lower prices. The
difference between the proceeds from your short sale and the cost to
repurchase those assets will be your profit.

However, the most direct way to participate in a rising dollar is to
short Yen or the Euro in the currency market. A 1 million Euro short
sale would require an equity investment (depending on the broker)
between $25,000 and $50,000. If you short 1 million Euros at $1.50
and if the dollar rises so that you can buy back the Euro at $1.25,
you will have made $250,000, which is a heck of a return on a
$25,000-to-$50,000 investment. Or you could bebop over to Paris and
convert $1 million U.S. into $666,000 Euros at $1.50, put the money
in a French savings account at 2 percent and, if the Euro falls to
$1.25, convert your Euros into $800,000 dollars ($134,000 gain) plus
a sweet 2 percent interest. And you could deduct the trip to Paris as
a business expense.

Address your financial questions to Malcolm Berko, P.O. Box 8303,
Largo, FL 33775 or e-mail him at mjberko@yahoo.com.

Dear Mr. Berko: We have a very good-quality portfolio of stocks and every once in a while my wife and I like to take a speculative plunge in cheap stocks selling less than $1 a share. We’ve never made any money speculating like this, but we can afford the risks and kind of enjoy the gamble.
Last week, while on an extremely difficult and very confusing business trip to Miami, we met this money manager who has his own firm in Miami. To shorten a very long story, this man made a very convincing presentation and would like us to invest $80,000 with him. All of the stocks in his managed portfolio sell under $1 today and he believes that most of the issues on his list can at least double or better in the coming 12 months.
My wife is 100 percent convinced and I must tell you that this man was professional, knowledgeable and sincere. He’s almost a new friend.
His “batting average,” as he calls it, is fantastic. In 1999, he was up 152 percent. In 2000, his portfolio was plus 261 percent and in 2001, his managed portfolio was up 202 percent. In 2002 and 2003, he was plus 179 percent and 136 percent, respectively.
The references he gave us verified those numbers and they were very enthusiastic about his performance.
My wife is chaffing at he bit to invest but I’m not as certain as she, which is why I’m writing this letter. Martha (my wife) says if you can recommend better low-priced stocks, then we will put $40,000 in your recommendations and $40,000 in his managed portfolio. Please advise us.
R.S.
Oklahoma City
Dear R.S.: Miami is a mecca for con artists, grifters, drug dealers and schlock brokers like your “knowledgeable and sincere” new friend. I’ll wager good money that his sincerity is 100 percent synthetic with a single, natural fiber.
Yes, that track record, in perhaps the worst-ever market environment, is phenomenal. However, a good con artist/schlock broker knows that a big lie is much easier to believe than a small lie, and you’re letter to me is living proof.
I promise you that this guy is so crooked he’d cheat on his prostate exam. I’m willing to wager money to mangoes that the references with whom you spoke are in this fellow’s employ. If you ring them once again, you will hear the same story, word for word and comma for comma.
I don’t know enough about penny stocks to recommend issues that can go into intergalactic orbit. Frankly, I don’t recognize a single name on that penny stock list, but the few I checked looked minutes away from bankruptcy.
I suspect someone at the Internet firm that you and Martha came down to visit – because they need start-up financing – introduced you to this fellow. When you and Martha had lunch with the firm’s someone, I suspect that this schlock brokster (who is certainly a friend of that someone) just happened to be at the same restaurant. How am I doing so far? Be mindful that I heard all this before.
Now, if you listen to me, I think you will avoid a $80,000 tax-loss this year or next. I’d like you to place that list of stocks in front of Martha. Ask her to close her eyes and with a pencil just mark any stock on that list.
Let’s assume that she marked Medi-Hut Co. Inc. (MHUT). Please note that MHUT is priced at 45 cents on your list and while it’s a legitimate company with employees and revenues, you can buy this stock all day for 8 cents a share.
OK, it’s your turn. Close your eyes and place a pencil mark on any stock on this list.
Let’s assume that you marked ZKid Network Co. (ZKID). ZKID is also a legitimate company with employees and is priced at 81 cents on your list. Well, you can buy shares of ZKID all day for 14 cents each.
In fact, every one of those small penny stocks on your list is probably marked up at least 500 percent. In essence, you’d be paying $80,000 for penny stocks that have a current market value of $16,000. This is a nice day’s work for your professional, knowledgeable and sincere new friend. It would also be a sad experience to memorialize your first visit to Miami. You’re in the process of “being had!”
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr. Berko: I’ve been following Wal-Mart since November 1999, when I almost bought the stock at $60 a share. Since then, I’ve seen its revenues nearly double from $177 billion to nearly $300 billion this year. I’ve watched its earnings practically double from $52 billion in 1999 to maybe more than $100 billion this year. I could have bought the stock in 1999, just before the split, in the $60s and I would have nearly doubled my money, according to the Value Line charts. But I didn’t.
Do you think I should buy the stock today? Do you think it could double again in the next five years? Do you think it will continue to grow as fast as it has? I don’t own any retail stocks, and almost all of my holdings are utilities, the pipeline stocks you recommended two years ago, some convertibles and closed-end bond funds.
Please give me your opinion. I have a $7,000 certificate of deposit that will soon come due, and I would like to put this money into retail stocks.
S.L., Elgin, Ill.
Dear S.L.: I think you are reading that Value Line chart incorrectly. All those squiggly lines are prices that are adjusted to reflect Wal-Mart’s (WMT-$52) 2-for-1 split. So when you looked at the Value Line chart for November 1999, WMT had already split 2-for-1 in May 1999. If you had bought 100 shares in November 1999 at $60, you would still have 100 shares today at $52, worth $5,200, and a paper loss of $800. Still, WMT’s revenue and income growth have been super, but its share performance have been less so, as you can see.
I have no doubt that WMT will continue to grow and grow. But with 4.3 billion shares outstanding and trading at 26 times earnings, I feel the shares are much too pricey. If you wish to own WMT, I recommend you place an open order to buy the stock at $43, which is about 18 times next year’s expected earnings of $2.36 a share. Failing that, you might consider the following two issues that may have significantly better appreciation potential than WMT.
Dollar Tree (DLTR-$27) owns 2,610 discount variety stores in 47 states retailing $3.2 billion of stuff priced at $1. DLTR’s stores look like yesterday’s five-and-dime stores, offering a wide assortment of general merchandise. Each store has four employees, and families with incomes under $30,000 account for 55 percent of DLTR’s revenues.
On the other hand, the typical Wal-Mart family has an annual income in excess of $44,000. DLTR’s net profit margins of 6.7 percent are twice that of WMT, and their location costs (second-tier strip malls) per $1 of revenues are one-third that of WMT. Revenues and earnings have increased twelvefold in the past 10 years, shares trade at 16 times earnings and future earnings prospects look bright. And 100 shares bought in 1994 at $30 for a total of $3,000 would be 506 shares today worth $13,156, which is certainly better performance than WMT stock.
Family Dollar Stores (FDO-$29) has more than 5,600 stores in 47 states and expects to generate $5.3 billion in revenues this year. These stores are located in small, rural areas and the merchandise is generally priced under $10. FDO, which trades at 18 times earnings, has no long-term debt, plenty of cash, excellent earnings projections and a classy net profit margin of 5.2 percent. Because 1994 revenues have increased more than fourfold, a 100-share purchase in 1994 at $12 for a total of $1,200 would be 300 shares today valued at $8,700. Certainly that is significantly better than WMT.
Neither FDO nor DLTR spends money on advertising, and both rely on closeout and overrun merchandise. Neither can match the world-class technology of Wal-Mart nor its clout with retailers. However, DLTR and FDO run a no-frills, penny-pinching business while offering the same popular brand products, such as Gillette, P&G and Colgate, as Wal-Mart. While Wal-Mart stores are located on the outskirts of cities, FDO and DLTR stores are downtown or adjacent to a low- or middle-class neighborhood.
It’s certainly easier to shop near home than fight traffic for eight miles to the edge of town and then eight miles back. While parking at a WMT store can be like negotiating a battleground, parking at a DLTR or FDO is a cinch. Heck, a lot of folks I know shop at DLTR and FDO and, on occasion, I’ll pop into a parking lot to spend $20 on sundries. It’s certainly more convenient, quicker and cheaper than Wal-Mart.
FDO expects to open some 500 stores and DLTR should open 400 stores this year. While the imposing Wal-Mart name appears intimidating, DLTR and FDO are profiting like Croesus on the customers WMT leaves behind.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr. Berko: Dow Jones has a group of stocks in its dividend index on which they maintain specific prices and keep daily tabs, sort of like the Dow Jones 30 Industrials. I think there are 50 stocks in this index, which according to my broker, has done better than the Standard’s & Poor’s in the past dozen years. Well, I’ve got $21,000 to invest for my individual retirement account.
Will you please look at that list and recommend five of those 100 stocks you think are the best in the list and perhaps I could buy 50 shares of each? My main goal is conservative long-term principal growth with good dividend growth.
R.R.
Joliet, Ill.
Dear R.R.: You are referring to the Dow Jones Select Dividend Index, which is composed of 50 individual stocks. Barclays Bank, in November, came out with iShares called the Dow Jones Select Dividend Index (DVY-$55) that trades on the American Stock Exchange. DVY’s performance should correspond to the Dow Jones Select Dividend Index, less fees and expenses. So you might consider investing some of your $21,000 into shares of DVY that has a current return of 3.57 percent.
However, among the 50 issues in the DVY, I feel the following five may have above-average long-term performance or may be among those with the best long-term performance potential. You can buy the DVY from your broker.
Universal Corp. (UVV-$49) pays $1.56 and yields 3.1 percent. This company buys, stores, processes and sells tobacco for cigarettes, pipes, cigars and chews. Tobacco represents 59 percent of revenues. UVV also distributes lumber and building supplies in Europe and sells commodities, which accounts for 41 percent of revenues. Dividends have been increased for 15 consecutive years.
MeadWestvaco Corp. (MWV-$28.80) pays 92 cents and that dividend yields 3.2 percent. MWV produces packaging, coated and specialty papers, specialty chemicals and office products. MWV also owns 130,000 acres of forestland in Brazil (more than 1,000 miles from the Amazon rain forest) plus 2.4 million acres of forestland in the United States. MWV lost money in the last three years but should earn a small profit this year and a good profit in 2005.
Lincoln National Corp. (LNC-$45) pays a dividend of $1.40, which yields 3 percent. LNC is a holding company that sells annuities, various forms of life insurance, mutual funds and managed account products. Wall Street analysts expect record earnings this year and record earnings in 2005. Meanwhile, LNC’s dividend has increased for 15 consecutive years and may increase this year as well as 2005.
Comerica Inc. (CMA-$54) with $55 billion in assets is the largest bank in Michigan and a multistate financial services provider. The $2.08 dividend yielding 3.8 percent has increased each year since 1988 and will probably increase next year. During the last 15 years, asset growth, loan growth and book value have increased impressively.
PPG Industries Inc. (PPG-$61) is an $87 billion global manufacturer of various glass products, fiberglass, coating, resins and industrial chemicals. Its current $1.80 dividend yields 3 percent and has increased each of the past 15 years. Record revenues and earnings and annually higher dividends are expected over the next few years.
While these are my favorite issues, they may not provide you with the performance of a more widely diversified selection of issues from the DVY. So I’d recommend that you also consider investing part of that money in a Unit Trust called The Dow Target Dividend Portfolio, which can also be purchased from your broker. This Unit Trust selects 20 issues they feel are the top performers in the DVY, which they believe will produce above an average total return from capital growth and dividend income. The strategies they use in selecting their 20 issues (if applied since 1992) would have generated a return, better than twice that of the S&P 500.
Another issue that you might consider along with those five stocks and the unit trust is a closed-end fund called The John Hancock Patriot Select Dividend Trust (DIV-$13.80). DIV’s $1.08 dividend (9 cents a month) yields 7.9 percent and it trades at a 1.4 percent discount to net asset value. DIV is 33 percent leveraged, has a portfolio turnover of just 17 percent and has $212 million in assets. Some of its top holdings are El Paso Tennessee Pipeline, Alabama Power, Bear Stearns, Energy East, KeySpan, DTE Energy, Lehman Brothers Holdings, HSBC and CH Energy Group.
So I’d suggest investing $5,000 in those five stocks, $5,000 in the unit trust $5,000 in DVY and $6,000 in DIV. And I wish you good long-term investing.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr. Berko: What is your opinion of Campbell Soup? They now seem to take up more shelf space in most supermarkets and I notice that their advertising is picking up. I think I’d like to buy 200 shares but figured I’d better get your opinion before I spend $5,000. I will be using the proceeds from a recent sale of Zimmer, which you recommended at $42 last year and sold 50 shares at $87. I think Zimmer will split and I will have 100 shares again. What do you think?
W.J.
Oklahoma City
Dear W.J.: In July of 2002, I bought 200 shares of Campbell Soup Co. (CPB-$26) at $21.
CPB has been in the downhill slumps since reaching an absurd high of $63 in 1998, when it had revenues of $6.6 billion and record earnings of $1.90.
CPB products are as much a part of Americana as V8 Juices, Godiva Chocolates, Prego, SpaghettiOs, Swanson, Franco-American and Pepperidge Farm. In fact, some prominent past spokespersons for Campbell Soups have been Ronald Reagan, Johnny Carson, Jimmy Stewart, Donna Reed, Orson Wells, Helen Hayes, George Burns, Gracie Allen and Robin Leach. If they say it’s ” M’m! M’m! Good!” it’s gotta be so!
This company outsells its leading competitor by 7 to 1 and owns 71 percent of the $4 billion soup market. While soups represent 41 percent of U.S. revenues they comprise 61 percent of U.S. profits. CPB has now learned that it’s not enough to remain a legend and rest on its past laurels. Between 1998 through 2002 management cut back on marketing figuring that current momentum would carry revenues forward. Big mistake that. Hard-hitting competition from private labels, General Mills and Heinz clobbered CPB’s profitability and morale.
The new chief executive officer (Doug Conant who took the helm in 2002) revived brand popularity and increased its marketing budget by $200 million a year. Conant spent heavily on new technology that improved quality and introduced “easy-to-open cans.” Conant increased the research and development budget, which created new products in the convenience market and new shelving designs.
The results were fabulous. Sales were up 16 percent (excluding underperforming divestitures) and profits grew by 14 percent last year.
The public’s new perception of CPB’s products has grown by orders of magnitude. This year, 71 percent of respondents considered CPB’s products superior to the competition vs. just 13 percent in 2001. Campbell is posting net profit margins of 10 percent, which is among the best in the food group. Campbell has achieved double-digit gains in its biscuits and confections products compared to an average 5 percent for its peers.
And CPB also seems to have positioned itself as an anti-obesity company. Its product categories are considered healthy and on trend with the market. CPB has a fair balance sheet and new management has reduced long-term debt to $1.8 billion from $2.4 billion since Conant took the helm. With new cost controls I think CPB’s book value could triple to $7 in the next four to five years, net profit margins could reach 10 percent and return on shareholder equity might reach 34 percent.
Campbell is a classy, pale-blue chip company with worldwide brand recognition, especially its iconic red-and-white cans of condensed soups. In the coming four years, CPB’s revenues could reach $8.5 billion and earnings could top $2.05 a share. However, I don’t expect any improvement in CPB’s niggardly 63-cent dividend.
Campbell, as you know, is one of those companies whose products are readily consumable and therefore generate frequent repeat sales. So in the coming four to five years, I think CPB could trade at an average price-earnings ratio of 20 and I think the stock could move to the $40-$42 level. That’s an average annual return of 15 percent, including the dividend. The growth prospects are attractively modest and as a long-term investor, you might do well owning 200 shares.
A number of our accounts own shares of Campbell Soup in their managed portfolios.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr. Berko:

Right at the top of the market in early 2000, I bought 100 shares of General Motors at $92. Today it’s $45. What’s wrong with the company? Do you think it will ever return to my purchase price or even $65 or $75 or $80 per share? Would you recommend that I buy another 100 shares at this much lower price? The annual reports are very positive and so are the quarterly reports I get. GM’s cars are good-looking and ride well. Sales are very good and GM will make $7.50 a share this year and the stock trades at a very low six times earnings. The current $2 dividend yields 4.5 percent and sales incentives are really bringing in new car sales. G.S. Syracuse, N.Y. Dear G.S.: I strongly doubt that General Motors Corp. (GM-$45) stock will get sufficient speed or momentum and return to your $92 purchase price in this decade. I think you and thousands of others who bought GM between January and June of 2000, when the price ran up to $95, bought shares in an overpriced, exceedingly mature, arthritic, cyclical, debt-heavy, Rust Belt company that hasn’t raised its dividend in seven years and whose net profit margins and return on shareholder equity continue to fall. Certainly, with rising interest rates and a consumer who is over his collarbone in debt and very nearly tapped out, it’s unlikely that 2005 new-car sales will approximate those of 2004 and 2003. Yes, I know that GM (which is also Saab, Isuzu, Opel, Vuxhall, diesel locomotives, small trucks, big trucks and trucks of all kinds, defense stuff, auto and truck financing, consumer mortgages, electronics, new parts, auto and life insurance, residential mortgages, auto service contracts, ad nauseam) does this stuff all over the free world. Perhaps that’s one of GM’s big problems. Like the time GM introduced a new car in Mexico called the Nova, unaware that “no va” in Spanish means “don’t go.” However, enormous fixed costs, impossibly aggressive unions, plus federal and state regulations that would warm a bureaucrat’s heart and unpredictable product demand are just a few of the mind-numbing characteristics that plague GM in every one of the 20-plus countries it does business. GM’s domestic cost structure (which is better than Chrysler and Ford) trails those of Honda, Toyota and other foreign competitors. And there’s nothing on the horizon that leads one to believe it will improve. While GM’s incentive-driven sales have aided current demand, they also put a brake on revenue growth for 2005 and 2006. High-volume sales (Ford’s and Chrysler’s too) have lowered used car prices and tanked new car values. Finally, GM’s daunting retiree obligations scare the bejabbers out of smart investors. There’s serious talk that GM might not be able to honor its commitment to those union workers who believed they were blessed with a sacrosanct, sweetheart retirement package. I like GM’s cars (I even own a GM auto) but I’d ask to be committed if I were ever crazy enough to buy the stock. This company is so huge that it is unwieldy, impossibly cumbersome, terribly bureaucratic, clumsy and clunky in its execution, unresponsive to consumer demand and almost impervious to change and improvement. GM has so many disparate parts, all moving in different directions that cogent concise, clear and effective management is almost impossible. General Motors, and all its moving parts, is a veritable Tower of Babel. Frankly, I think investors would be better off if GM were to pull an American Telephone & Telegraph and divide itself into six or seven different companies, each with its own product, executive suite, board of directors and listings on the New York Stock Exchange. Perhaps GM would have a Chevrolet division, a Pontiac/Oldsmobile/Saturn division, a Truck division, a Finance division, a Cadillac division and an Industrial Equipment division. Each division should be autonomous, independently competitive and responsible for its own future. This might be the only way to maximize shareholders’ value and possibly the only way you will ever see your purchase price again. Without a divestiture of this nature, GM is just a bungling, bumbling, awkward giant of a company that will continue to lumber along, taking the path of least resistance. Because I believe that you will never get your money, I suggest you sell the stock and place the proceeds in greener pastures.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net. © Copley News Service Visit Copley News Service at www.copleynews.com.

Dear Mr. Berko: At age 28, I’ve become the unexpected beneficiary of a $500,000 life insurance policy that my dad left me. I need to invest the money but do not have any knowledge about investments. Can you recommend a book that will help me to become a good investor?
I recently met a stockbroker through the insurance man who handled my dad’s policy. The broker seems very personable, knowledgeable and professional. He gives classes on the stock market at his firm’s office and I’ve been invited to attend his classes to learn everything I need to know about the market so I can invest wisely. Which do you recommend, the course or a book?
T.G.
Delray Beach, Fla.
Dear T.G.: Asking me to recommend a book on the stock market so you can become a successful investor is like asking me what book one should read to become a good basketball player. You can read a thousand books on basketball and become one of the most knowledgeable people on the court but that doesn’t mean you can be a skillful player.
Knowledge is no substitute for skill. Being skillful at what you do requires a lot of good experiences and good experiences are the result of a lot of bad mistakes. So it is with books on the stock market. You may become knowledgeable. Yet it takes experience to become good (or skillful) at investing, but most of us can ill afford bad mistakes along the way to achieving good experience.
There are literally thousands of books on the stock market: books on technology stocks, growth stocks, charting, trading, income stocks, oil & gas stocks, options, convertibles, income statements, bank stocks, balance sheets, load mutual funds, no-load funds, closed-end funds, exchange traded funds, real estate investment trusts, public limited partnerships, cyclical stocks, penny stocks, ad nauseam. I could go on for pages.
Frankly, every one of those books is as boring as a Japanese Kabuki dance and none of them is worth a box of rocks unless you can turn that information into experience. It’s hard to believe that with a subject as popular as money and $13 trillion in securities trading on the Big Board that I can’t find an easy-to-read, fun-to-learn, Johnny-On-The-Dot book for a double sawbuck at Borders or Barnes! For the most part, stock market books are about as useful as books that promise to show you how to make big money in real estate.
I feel you’d be better served attending investment classes at your community college. Most often those classes are taught by stockbrokers and because stockbrokers are salesmen they often put some personality into the subject. A typical course is usually five to seven sessions (evening or afternoon) and each session can last between two to three hours and the cost is often minimal. A classroom ambience, the spontaneity, the questions and answers, the give and take and the personalization often create a superior venue for learning. An investment course can also be a social occasion. It gives you a good reason to get out of the house and, who knows, you might even meet an eligible mate.
Now, while this broker may appear knowledgeable and professional (and no doubt he is) you must be mindful that he’s also a salesman and probably a very good one. Becoming the beneficiary of a $500,000 life insurance policy is not a daily occurrence and it might be right for me to assume that this “knowledgeable and professional broker” could be extremely anxious to have you as a client. So it’s incumbent upon me to warn you to be wary.
Therefore I will recommend one book. It’s a book by Charles Ellis, a former big shot at Donaldson, Lufkin & Jenrette, a Wall Street insider and a close buddy of William Donaldson, who is chairman of the Securities and Exchange Commission. The book is titled “Winning the Loser’s Game: Timeless Strategies for Successful Investing.” The 66-year-old author has written numerous books (all boring) but in this book, he is an iconoclast and tells the reader not to take advice from the brokerage industry. He tells you not to trust brokers.
“Don’t be confused about stockbrokers. They are usually very nice people but their job is not to make money for you. Their job is to make money from you.” Now where have you heard this refrain before? Ellis notes that the typical stockbroker visits with some 200 customers a year who collectively have about $5 million in the stock market. In order to make $100,000 a year, that broker has to generate $300,000 in commissions, which is 6 percent of that $5 million in assets. As a result, Ellis says, “the broker cannot afford the time to learn what is ‘right.’ He has to keep the money moving – and it will be your money.”
Take your course. Enjoy it as much as you can. Learn as much as you can. But, at age 28, you might not have enough experience to make your own investment decisions. So before you invest a penny, peso or pound, I recommend that you join an investment club where the members put that knowledge to practical use.
Investment clubs are often great social get-togethers and good learning experiences. So after you’ve taken that course and when you’ve completed a year as an investment club member and after you read the Ellis book, please write me again.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr.

Berko: Please give me your opinion on Bank of America. I hear it might be bought out by another large bank. Can you identify that bank and can you tell me what the purchase price might be? I’d like to own the stock and a takeover possibility makes owing the stock even more attractive. Please respond as soon as you can because I’m depending on your answer before I make a decision and I don’t want to miss out on a potential takeover opportunity.
W.L.
Columbus, Ohio
Dear W.L.:

Bank of America Corp. (BAC-$84) could possibly be a takeover target but its gotta be an awfully big bank. I doubt that Citigroup Inc. (C-$45), which is ranked No. 1, or J.P. Morgan and Chase Co. (JPM-$37), which just bought Bank One and is ranked No. 2, can be the “takeroveree!” If BAC is a takeover target, the most likely suitor will be a British, French or German bank. And while Japan has some of the largest banks in the world, I strongly doubt that any Japanese bank will be a contender due to insurmountable cultural differences and a difficult language barrier.

I kind of doubt that it will be a German bank, certainly for the same reasons. Just look at what happened when Daimler Benz took over Chrysler. While those companies are in the same business, they are as different as cheese and chalk. So if BAC is a target, it will probably be an English or a French bank. The English banks that could have an interest in BAC might be Barclays, HSBC Group, Lloyds TSB Group or Royal Bank of Scotland.
The only French bank that may be capable of buying BAC would be BNP Paribas, which has indicated a strong interest in having an American presence. BNP Paribas recently paid $1.2 billion for Community Bankshares, which has more than 500 branches in 18 states. In fact, BNP’s chief executive officer, Baudouin Prot, has told the press that BNP plans more acquisitions in the United States and Europe. In 2001, BNP paid $2.5 billion for the very profitable Banc West.
BAC, with 21.2 million household accounts and 2.2 million commercial accounts, would make an attractive takeover target for a European bank seeking to enlarge its customer base. And BAC is an impressive operation, with some of the strongest profits in the banking business.
But BAC’s merger with Fleet Bank is causing concern on Wall Street. While the merger will create a banking behemoth with almost $1 trillion in assets, there is worry that earnings quality could be clouded by $750 million of anticipated merger-related changes. Some of the suits on the Street feel that BAC may have overpaid for Fleet and that Fleet does not bring enough to the table to justify the steep price paid by BAC. I think they’re wrong.
Now I’m guessing that a takeover price for BAC, if it does become a player, would be between $96 and $105 billion, and possibly higher as the planned merger between J. P. Morgan and Bank One looks like it may add some spice to share price. Wachovia Corp. (WB-$44) is on the prowl and may propose to several mid-sized banks in the next dozen months. Germany’s Deutsche Bank is rumored to have its eyes on several moderately large U.S. banks. And England’s HSBC, which already owns a nice portfolio of American banks, wants to spread its wings over a larger slice of the U.S. banking pie. According to the suits Amsouth Bancorp. (ASO-$25), Mellon Financial Corp. (MEL-$29), KeyCorp (KEY-$30) and City National Corp. (CYN-$65) may be likely targets.
Buyout or not, I think BAC may be a swell addition to your portfolio. Not including the Fleet acquisition, BAC’s assets this year are likely to rise from $730 billion to $780 billion and its loan portfolio should grow by 10 percent to 11 percent. Return on assets may be down from a strong 1.48 percent to 1.44 percent. And while most banks have a loan-to-asset percentage between 58 percent and 65 percent, BAC loans-to-assets are just 51 percent, which certainly gives BAC a lot more room to increase its loan portfolio. Meanwhile, BAC’s $3.60 dividend, yielding a sweet 4.3 percent, could grow very nicely over the coming years as I suspect its loan portfolio and profits will too.
Buy 100 shares as a long-term investment but not as a short-term frump. BAC may be the closest thing in the United States to a true nationwide bank. BAC is the strongest participant in some of the most prolific, dynamic and impressive growth regions in the country. The addition of Fleet Boston, gives BAC have half again as many locations as its closest rival. With the addition of Fleet Boston, BAC’s dominance could increase greater than the sum of its parts.
Many of my clients and I have positions in Bank of America.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr. Berko: Please tell me about the Chicago Merchandise Market where many of the world’s commodities are traded. I am thinking of buying 50 shares and would like your investment advice on this company.
T.S.
Kankakee, Ill.
Dear T.S.: The Chicago Merchandise Mart is a huge building that sells home accessories (furniture, carpets, appliances, etc.,) to retailers. It’s been around for eons and is not a public corporation. It’s the Chicago Mercantile Exchange Inc. (CME-$144.25) to which you refer. This is a designated market for high-powered junkies who get their rush and thrills trading futures contracts on options and options on futures, such as interest rates, stock indexes and commodities.
CME’s most visible products are the Eurodollar, the Standard & Poor’s 500 and other S&P index contracts, as well as Russell and Nekkei Index Contracts.
The CME also trades hogs, pork bellies, feeder and live cattle, butter, milk, fertilizer, lumber and the Goldman Sachs Commodity Index. CME trades the Mexican peso, the Russian ruble, the Swiss franc, the yen, the Canadian dollar, the British pound and other foreign currencies. CME trades interest rate futures, total return asset contracts (TRAKRS) and weather contracts.
CME, the largest futures exchange in the United States, came public in 2002 when it became the first U.S. financial exchange to demutualize into a shareholder-owned corporation.
Almost all of CME’s contracts trade electronically and CME pioneered global electronic trading for its derivative contracts. CME owns its own clearinghouse so it settles every contract it trades. Last year, the CME processed and cleared an average of 720,000 contracts each day, acted as custodian for about $37 billion in collateral and moved a daily average of $2.4 billion of settlement funds through its clearing system.
The CME’s customer base is almost exclusively professional traders, financial institutions, institutional investors, major corporations, large manufacturers, producers, dairy farmers, cattle and pig ranchers, multinational entities and governments. And of course, there’s the civilian trader (a Merrill, Dean Witter, PaineWebber, Goldman Sachs, A.G. Edwards or Lehman client) who thinks he has the genius to compete with the big boys and ignominiously fails almost every time.
In 2000, this customer base contributed $243 million in revenues that generated $59 million in net income or $1.78 a share. Last year, those pros generated $545 million in revenues that contributed $122 million in net income of $3.66 a share. Last year, the CME declared its first dividend of 63 cents a share, which has subsequently been raised to $1.04 today. This year, Wall Street thinks that CME will increase its net income to $4.95 a share and in 2005 the Street expects CME to earn between $5.62 and $6.55 a share.
CME has no debt, just 33 million shares out, a growing book value ($17) and a comfortable stash of cash. It came public at $25 in 2002 and has increased fivefold in value since. Because of the nature of its business and because of the continuous additions of new commodity trading products and because the CME is held in high esteem by the world financial community, I believe it will continue to grow its revenues and earnings at a good pace.
The nature of the CME’s business is resistant to uncertainly because its business is dependent upon economic and political changes in the world’s communities. Since there are institutions, corporations, government and people who need protection against the price changes created by uncertainties, the CME business model is a splendid fit.
CME enables a farmer to know exactly what his fertilizer costs will be next year, helps a home builder guarantee construction prices in nine months, permits a lender to lock in interest rates, enables big multinational companies to eliminate currency losses and assists portfolio managers to lighten account exposure and reduce a portfolio volatility.
I think the CME has splendid long-term potential. At this lofty price, I’ve got to assume that its board might call for a stock split.
There isn’t a hint of monkey business at the CME and the combined earnings of the chief executive officer and chief operating officer are under $4 million a year. The guys and gals who make up the board appear to be straight-up and candid folks. To the best of my knowledge, there’s no scalping, the clearing facilities are above suspicion, trading takes place only at designated hours, and the highest paid employee is Craig Donohue who is the CEO and earns $1.6 million a year.
But I would not be comfortable with the stock that has doubled in price during the last 12 months. And I would not be comfortable buying a stock that sells at 35 times earnings.
Looking at it another way, I would not be comfortable paying $4 billion to own a corporation that will have a net income of $200 million this year, which is just a 5 percent return. I can earn 6 percent with zero risks, so it doesn’t make good business sense to put money at risk and earn 5 percent.
If CME could fall in price to the $100-$110 level, I’d be a comfortable investor, but not at the currrent price.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr. Berko: I have several questions I hope you can answer.
Can you please explain in simple language why the stock market tends to fall when interest rates rise? And can you please explain why the price of a municipal bond will fall when interest rates rise?
I have two $10,000 face value municipal bonds that have a 28-year life and pay 4.5 percent. Should I sell those bonds? And if interest rates rise should I sell my stocks?
I bought about $121,000 of stocks last fall, which are worth $148,000 today. The economy seems good and it looks like Federal Reserve Board Chairman Alan Greenspan intends to increase rates because he thinks unemployment is too low and U.S. business profits are too strong.
Why would the stock market be so unsettled now if things look so good? Inflation is low and unemployment is just 5.5 percent and the market should be up.
I really need your help on what to do.
G.T.
Gainesville, Fla.
Dear G.T.: We must be a nation of pessimists. You say that the unemployment rate is 5.5 percent rather than 94.5 percent of all Americans are employed and you probably say that the glass is half-empty rather than half-full. I prefer the latter because it’s a positive statement. Odd and funny people, we!
The economy is gaining strength, worker productivity is impressive, corporate revenues and dividends are reaching record levels and job growth is strong. Yet the stock market seems to be in turmoil. The spoiler behind all this good economic news is Federal Reserve Board Chairman Alan Greenspan.
The stock market usually moves in inverse proportion to interest rates. Low rates reduce the cost of capital and increase corporate profits, so the stock market usually rises. Conversely, high interest rates increase the cost of capital, which reduces corporate profits and the stock market usually falls.
The cost of a barrel of oil has the same effect on the market. Low oil prices reduce the cost of conducting business (think of the airlines) while high oil prices increase that cost. If, during the past few years, we had low oil prices along with low interest rates, the stock market might have risen much higher much sooner.
Now to answer your municipal bond question. Let’s assume for illustrative purposes that in July 2003 you invested $10,000 in an insured municipal bond maturing in 30 years with a fixed coupon of 4 percent. This bond will pay you $400 in interest every year. Now let’s assume that it is July 2005 and because Greenspan has raised interest rates, a 30-year AAA municipal bond has a fixed coupon of 8 percent. Therefore, a $10,000 investment would pay you $800 in annual interest for 30 years. It wasn’t that long ago, under the aegis of Greenspan, that municipal bonds were yielding 10 percent.
When interest rates rise to 8 percent, the resale value of that 4 percent municipal bond will fall like an apple from a tall tree. No one of sane mind would pay you $10,000 for that 4 percent bond (which earns $400 in annual interest) when one can invest $10,000 and earn 8 percent, or $800 in annual interest. So the resale value of your 4 percent bond must fall to a point where an investor can earn today’s current rate of 8 percent. Therefore, this bond will drop in value to $5,000 because 8 percent of $5,000 earns $400 in interest income. If the buyer wanted to earn $800 in interest income, he could purchase two 4 percent bonds at $5,000 each or one bond paying 8 percent.
I think your 4.5 percent municipal bond in today’s market, even though it’s tax-free, is patently ridiculous. And I’d sell those two bonds quickly. Don’t look back, just do it.
You have a dandy portfolio of pale-blue chip issues that should provide you with better-than-average long-term dividend and principal growth.
But to sell or not to sell, is that not the question? Issues like Synovous, Developers Diversified, Royal Dutch, Kaneb Pipeline, ConAgra, Plains All American, Sara Lee, Pfizer, Citigroup, Anheuser-Bush, Staples, Colgate, Bank of America, Family Dollar and others, which you bought in the fall of 2003 at lower prices should be lifetime keepers.
Each has superb dividend growth, excellent revenue growth, dependable earnings growth and they trade at compelling and attractive price-earnings ratios. I would consider it blasphemous to sell a single share of those issues.
Markets like to anticipate events and I think the Dow has factored in at least one rate increase, maybe two into the current averages. After all, the Dow is still in negative territory for 2004 so in some cases, it is too late to sell at top dollar.
The real question is: How many more times will Greenspan raise rates and how quickly will he raise them?
Greenspan tells us that rates will rise gradually, but I trust his word about as much as a lab rat should trust a research biologist. Many of us recall 1994 when Greenspan promised a gradual increase in interest rates. Ha! In 11 months he raised rates from 3 percent to 6 percent, the bond market plunged and the Dow got all wussy.
Either way, the bond market and the stock market will always do what it is expected to do but never when they are expected to do it. If Greenspan acts in the future as he has in the past, then I think the Dow may be in for some rough riding.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr. Berko: I’ve been thinking about buying 300 shares of Dell Computer again. I recall a few years ago, when Dell was trading around $55-$57, I wrote and asked if I should buy 200 shares. You almost bit my head off while telling me, “No!” Well, I’m back with the same question now that the stock is 20 points lower. Do you think this is a good entry point for the stock?
B.E.
Fort Walton Beach, Fla.
Dear B.E.: During the past month, I’ve received an enormous amount of mail asking if now is the right time to buy Dell Computer. I remember your letter of a few years ago. I’m sorry I was a bit rough, but I felt that was the only way I could get through to you. And as you can imagine, most papers would not have printed many of my comments, some of which may have sounded like blasphemy.
However, I still think Dell Inc. (DELL-$37) makes a fabulous computer. But I’m going to tell you a little secret. Dell’s computers, for the average Joe and Jane, aren’t any better than a Compaq, E-Machine, Apple or Gateway. Oh, certainly the spacey geeks and myriad emotional Dell-Heads will go ballistic with indignation. However, for 99 percent of us the difference between a Dell and the others is like the difference between a Ford, Chevrolet or Chrysler. You plug ‘em in the same way, their keyboards are almost identical, the insides are similar and each takes you where you want to go.
In fact, Dell kind of reminds me of the automobile companies, the stocks of which are about as exciting as watching summer reruns of “The Waltons.” Dell will continue to grow its revenues and earnings but it’s basically a mature company.
The shares currently trade at a 35 price-earnings ratio, which, in my opinion, is too high by half. Its net profit margins are faltering (from 8 percent a few years ago to 6.2 percent this year) and return on shareholder’s equity has crashed from 52 percent a few years ago to an expected 38 percent this year. Those are still good numbers, but as those numbers came tumbling down so did Dell’s P/E from a high of 74 a few years ago.
Margins in this industry are laser thin and Dell is cutting corners to squeeze costs into profits. But so are Gateway, Hewlett Packard, Apple, etc. However, Dell is going a few steps farther and toilet training the U.S. consumer to accept inferior service. The next time you need Dell’s customer service you’re gonna ring a call center 12,000 miles away and speak to someone in India who will respond to your question by reading the answers from a prepared text.
But Dell’s big problem in a few years will be competition from Korea, China, India, Malaysia and Taiwan. Just as the Asians have toppled the Big Three automakers from their sacrosanct ivory-tower kingdoms, they will enjoy similar successes knocking Dell, Apple, Gateway, etc. from their pinnacles of power. As sure as God makes sweet, red strawberries, the current $36 share price, down from the high $50s a few years ago, reflects that uncertainty.
Still, Dell’s next few years appear quite sanguine. The company’s high-margin products – such as servers, storage and notebooks – continue to gain momentum. Dell’s low-cost, direct sales are hurting its competitors. And Dell’s push into consumer electronics seems to be having some initial successes.
So Dell’s interim prospects look bright and top-line growth should respond quite favorably. Revenues could increase about 45 percent from this year’s $48 billion to $71 billion by 2008 and earnings may increase as much to $2 a share. But in my opinion, Dell is not worth 35 times earnings, which would put its share price at $70.
While demand for computers will continue to grow, I believe that the power behind this demand will be fueled and driven by new technological innovations in personal computers and laptops. So be mindful, that while Dell is an innovator in the manufacturing and selling process, the company does not have the technological experience or strength to take its products to the next generation. So, this time, I will very nicely tell you that Dell doesn’t ring my bell.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr. Berko: I bought 1,000 shares of Delta early last year at $7.25 and sold it a couple months later at $12.50. I bought it again in August at $10 and sold it at $14.75. I think Delta has a good chance of pulling out of its slump and I’d like to roll the dice again.
This time, I’m thinking of buying 2,000 shares. The first 1,000 shares I would keep long-term and wait a year or two for the company to completely recover and the second 1,000 shares I’d like to buy at $6 or $7 and sell when I can make three or four points. Could I please have your thoughts?
W.E.
Oklahoma City
Dear W.E.: Delta Air Lines Inc. (DAL-$6.50) has a chance of survival but it’s a small chance and I’m not sanguine about its future. In fact, Delta recently engaged Davis Polk & Wardwell, a prestigious bankruptcy firm based in New York, to help it explore options.
By the end of this year, DAL will have lost almost $4 billion and will have laid off more than 16,000 employees. The airline has just enough cash to last it through the summer and it looks like the rats are leaving a sinking ship.
So far this year, DAL’s chairman and chief executive officer, Leo Mullin, bailed out, Frederick Reid the president and chief operating officer jumped overboard and then Michele Burns, the chief financial officer, pulled up anchor. Adding insult to injury, Delta’s chief labor negotiator, Terry Erskine (a man of legend status and considered the most capable, knowledgeable and respected in the industry), stopped rowing and pulled in his oars.
According to sources close to Erskine, union work rules and wage demands border on the zealotry of suicide-bombers. It seems that DAL pilots, many of whom receive Air Force pensions, are the most intransigent of all. Many are making $300,000 a year plus benefits and their union is as flexible as a brick. Delta’s pilot expenses are the highest in the industry. However, excluding their salaries, DAL’s cost structure is competitive among major airlines and actually is improving.
Delta may survive. If it does, it will survive as an injured carrier in need of a lot of rehabilitation. DAL’s rehab will require a Herculean effort and even then I’m not confident it will be half as healthy as before.
Delta’s pension obligations are intensifying, placing the carrier several hundred million dollars in the hole. Its onerous debt load of almost $13 billion and its $300 million of preferred stock hangs on DAL’s neck like an anvil. Low-cost carriers like Jet Blue, Southwest and Air Tran are eating DAL’s lunch and enjoying seconds.
Because you “like to throw the dice,” I won’t tell you not to purchase 1,000 shares of DAL. But when the honchos in the executive suite bail out, that’s a message you should read a bit more thoroughly.
If DAL survives I doubt it will survive in its present form. The business models and operations manuals of large carriers like American, United, USAir, etc. are almost prehistoric (at least pre-cellphone days) and are akin to using watered-down, low octane gas in an engine that needs super, high-octane fuel. So these carriers will just sputter and sputter until they finally are forced to fold their wings and follow Eastern, Pan Am and Braniff into airplane heaven.
Delta could have a couple of temporary spikes in its share price and you may shill a few points from its $6.50 price, but I think there are better birds in the sky or finer fish in the sea on which to “take a shot or drop a hook.” Delta, American, etc. are relics that belong in the Smithsonian. There is a new breed of carrier that could be putting the old guard out of business.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr. Berko: I’m thinking about buying 200 shares of KLM Royal Dutch Airlines at $20. I know they lost more than $10 a share last year but estimates predict a profit this year of almost to $1 a share. The company has a book value of more than $41 a share and it pays a 11.5-cent dividend. What do you think?
B.H.
Elkhart, Ind.
Dear B.H.: By the time you read this, KLM Royal Dutch Airlines will have merged with Air France. The new airline, Air France KLM, will trade on the Big Board under the moniker AKH and today’s price is $16.50 a share. This entity will have $23 billion in revenues, vaulting it over American with $17.5 billion, making it No. 1 in the airline world of revenues.
Under the terms of this deal, the French government will own 45 percent of Air France-KLM. That might be a good reason not to own shares of this airline.
Supposedly the new airline is to be jointly managed by KLM’s chief executive officer, Leo van Wijik, and Air France’s chairman, Jean Spinetta. Remember what happened a few years ago when Daimler Benz swallowed Chrysler and ousted most of Chrysler’s management – creating an international donnybrook that still smolders today? Shortly after the marriage, the new stock crashed from its $117 merger high to $26 last year.
These two high-powered airline mavens believe that the synergies from this merger will save a huge bushel of francs and a big bundle of guilders. And the French promised the Dutch that not a single airline job would be lost as a result of this merger. They believe that they can save at least $90 million (peanuts) the first year by better managing its fleet of 570 aircraft. They believe that in following years, they can save $600 million annually by closing 80-plus route destinations, eliminating overlapping flights and consolidating all other activities while keeping dual headquarters in Paris and Amsterdam. Hmm.
Two airline big shots (one is retired) tell me that AKH will have to lay off between 25 percent and 35 percent of its joint payroll to meet those savings goals. But whose heads will roll? Well, because the French government owns 45 percent of the new company, you can bet your croissants that most of the walking papers will be given to the Dutch. If not, the contumacious French unions will encircle de Gaulle airport with tractors, bulldozers and wagons so that not even a helicopter will be able to land. And then the French government will cave in again to the unions.
The European airline business is in tatters and this merger between KLM and Air France could easily weaken Germany’s Lufthansa, which has already lost more than $1 billion and is groping blindly for salvation. Italy’s Alitalia shares were recently suspended from trading as the Italian government warned of bankruptcy because talks between the carrier and its unions are failing. The Italian government owns 62 percent of Alitalia, which is losing $60,000 an hour. Plans to lay off about 4,000 Alitalia employees in May resulted in wildcat labor strikes at airports across Italy. Need I remind you that the French government owns 45 percent of Air France-KLM?
Arguably, the best time to buy a stock is when blood is running in the gutters and not a soul on the horizon is willing to put a dollar on the table. However, in this specific instance, I think you may be pushing the envelope far beyond the limits of caution.
Carriers like Air France-KLM, Lufthansa, Alitalia and American, Delta, United, etc., are dinosaurs. Their labor unions have strangulation work rules that create massive inefficiencies, labor costs are frighteningly high and, per dollar earned, airline employees may be among the least productive workers in the industrialized world.
These carriers have very fragile balance sheets. They have debilitatingly high fixed costs to finance outrageously expensive aircraft that are high-maintenance and guzzle fuel like aircraft carriers. As if that weren’t enough, these carriers are stuck with a genre of management who continue to promote the old style of doing business. These older carriers are Rust Belt and smokestack airlines and will not survive in their present corporate structure.
The new kids on the block are the smaller, more flexible and nimble lines like Southwest, Ted, Air-Tran, Song, Jet Blue, Virgin Atlantic, etc. They have low fixed costs, younger, creative management, flexible work rules and efficient planes. These carriers are the future of the industry. TWA, US Air, British Airways, Continental, Northwest, et al. are today’s troglodytes – like Packard, Hudson, Studebaker and Oldsmobile were to automomakers.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr. Berko: My mother passed away last year at age 69. She had a regular individual retirement account that was worth $72,300 in four different mutual funds. About six months after Mom’s passing, Dad went to the bank where Mom had her IRA and gave the broker there a copy of Mom’s death certificate and told the broker that he wanted to get income from Mom’s IRA.
The bank broker told Dad (who just turned 70) that he had two options. He could cash out Mom’s IRA, sell the funds, put the money into an immediate annuity and get $541.14 a month as long for as he lives but he would never be able to touch the principal. The second option was to cash out the IRA and put the funds in a certificate of deposit (where he would have access to the principal) and get 3 percent a year.
Well, Dad decided to do the CDs. In March of this year, our accountant told Dad that he had taxes to pay on the whole amount he got from Mom’s IRA and that the broker at the bank gave Dad incorrect advice. We asked if we could put the money back into Mom’s IRA, but the accountant said that there’s a very strict 60-day rule to put withdrawn funds back into Mom’s IRA. Because it’s been nearly four months since Dad made the change, he is responsible for the taxes, which could be as much as $23,000.
Our accountant told us that Dad could have moved Mom’s IRA into his (without taxes) and then invest the money in utility stocks, bonds or preferreds at a higher interest rate.
Do we have any recourse at the bank for the bad advice the broker gave Dad?
G.S.
Boca Raton, Fla.
Dear G.S.: Today’s IRA rules have been made intentionally more complicated by Congress at the request of the American Bar Association and the American Institute of Certified Public Accountants. A very close source, who is a big shot with the ABA, tells me that the ABA together with the AICPA have very quietly lobbied Congress to obfuscate the rules for the public so members of both organizations can generate higher fees.
Most brokers should know that your dad can (without a tad of tax) move his wife’s IRA into his IRA and that should have been the broker’s advice. Be advised that banks can often be a very poor source of investment and tax advice.
There is recourse. That very rigid 60-day ruling has been waived by the Internal Revenue Service if the taxpayer was legitimately given incorrect advice by a broker, accountant, banker, etc. This new wrinkle can be found, clearly hidden in the new tax legislation passed by Congress in 2001, and pertains to mistaken withdrawals made in 2002 and after. It’s a “private letter” ruling and so far the IRS has ruled favorably in every instance.
Sadly, very few people know about this legislation; certainly your accountant did not.
And yes, there is recourse against your banker. While most CDs have an early withdrawal penalty, this bank should waive that penalty because their representative gave your dad incorrect advice. If they refuse to waive the early withdrawal penalty, please call my office and tell me so. I will send the bank’s chief executive officer a copy of this column (note that I did not mention the banker’s name nor the name of the bank) and follow up with a personal phone call.
There’s little doubt in my mind that the bank will allow you to cash in the CD without a bean of penalty. If you have to pay some fancy lawyer to obtain a “private letter” ruling, I think the bank, with alacrity, will be pleased to pay their legal beagles to do it for you.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr. Berko: My broker wants me to buy 800 shares of R&G Financial, which is a Puerto Rican company. My broker insists that Puerto Rico will become our 51st state within the next two years and that when this happens, he thinks R&G’s banks, insurance and mortgage companies will really take off because of federal government support.
This bank has had a very good record of revenue growth and its earnings have been very good. My broker thinks this stock could go to $55 a share when Puerto Rico becomes the 51st state. So, do you think I should buy the stock?
W.N.
Syracuse, N.Y.
Dear W.N.: I recently spoke with a member of Congress who assured me that “an elephant would sooner flap its ears and fly than would Puerto Rico become our 51st state.”
Why would Puerto Rico ever want to become a state? The U.S. government currently spends billions of welfare dollars to assist the 4 million people on that island, none of whom have to pay U.S. taxes. Every Puerto Rican is a U.S. citizen with all the benefits of citizenship (including Social Security), so why should they screw it up, become the 51st state and have to pay federal taxes? Those lucky folks have their cake and, because of the generosity of Congress and the courtesy of U.S. taxpayers, they’re eating it, too – as well as the delightful frosting.
Today, Puerto Rico has more federal government support (economic, educational, Medicaid, highways, hospitals, food programs, etc.) than most states. Puerto Rico, approximately the size of Rhode Island, has a gross domestic product of $72 billion and 14 percent unemployment.
While R&G Financial Corp. (RGF-$31.54) has earned an excellent record of revenue, earnings and dividend growth, I’m not comfortable owning that company. Still, RGF has been a wonderful success since coming public in 1995.
RGF is a well-diversified financial holding company with operations in Puerto Rico and the United State that provides banking, mortgage banking, investments, consumer finance, and various kinds of property and casualty insurance packages through its wholly owned subsidiaries.
RGF has been among the fastest-growing Puerto Rico banks, it’s the second-largest mortgage banker and the second-largest originator of Federal Housing Administration/Veterans Affairs mortgages in the New York area (yes, New York). RGF’s mortgage business, 34 offices in Puerto Rico and four in the United States, provides 28 percent of net income. RGF’s banking business, 31 branches in Puerto Rico and 14 in the United States, contributes 66 percent of net profits while the remaining subsidiaries contribute 6 percent of RGF’s net income.
During the last 10 years, RGF’s capable management has increased deposits, loans, investments and book value every year. During the last decade, RGF’s management has also increased the dividend each year from 1 cent to 35 cents, earnings from 37 cents to $2.56 and revenues from $101 million to an expected $725 million this year. In fact, RGF is a textbook example of how a bank should be run. I’m hugely impressed that this bank was able to expand its loan portfolio during the fourth quarter of 2003. That took a lot of work.
However, I believe that the Puerto Rican economy is losing its oomph, and if the Federal Reserve raises rates this year, it’s likely that RGF may not be able to continue to increase its loan volume, mortgage profits and revenues.
The suits on Wall Street have a neutral investment outlook of thrifts and mortgage companies. Mortgage rates have risen dramatically in the past two months, and these higher costs – coupled with fewer refinancing candidates – presage a significant reduction in the overall mortgage business. This, combined with a weak economy, high unemployment, a heavy reliance on mainland United States, the repeal of tax incentives American firms once enjoyed, a heavy dependence (93 percent) on oil for energy needs, a large loss of manufacturing jobs and fewer tourists visiting the island makes one think that RGF shares may have hit a wall at its post-split high of $35.
There are nine suits following RGF, six of whom rank this stock a “buy.” RGF’s price-earnings ratio, its price-to-book and its price-to-cash flow are lower than competitors in its sector. Yet its percentage of institutional ownership is less than that of other thrifts in its sector. I’m not surprised that funds like Fidelity, Vanguard, Putnam, MFS, Merrill Lynch, Franklin, Invesco or Templeton don’t own shares of RGF. I think I’d follow the lead of these huge fund companies and not buy the stock, either.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr. Berko: I think I would like to buy 1,500 shares of El Paso Corp. that traded in the mid-$70s just a few years ago. I had bought 200 shares at $32 in early January of 2000 and sold it nearly 12 months later at $72.
A lot has changed since then, but I would like to invest about $10,000 and buy 1,500 shares (it’s now $7.25) as a gamble because I think the stock could double in a year or so. Please tell me what you think of the company and if you believe this purchase has an opportunity to make a good profit. I prefer income investments, but every once in a while I get a bug in my head (like this one). Because I can afford to gamble a little bit, I’ll toss the dice a couple times a year.
B.W.
Durham, N.C.
Dear B.W.: “Out of the Wild West town of El Paso – not far from Rosa’s cantina” is El Paso Corp. (EP-$7.25) that “shocked” investors “by the foul, evil deed,” when last January it cut its estimate of proven natural-gas reserves by 1.8 trillion cubic feet.
“Off to the right were five mounted cowboys, off to the left rode a dozen more,” and they shot holes in the stock crashing it from $9.50 to $6, where it hit the floor.
Certainly you’ve heard that old truism by Marty Robbins: “When you see one cockroach run across the kitchen floor, you can be sure that there will me many more.” Well, as you know, Shell Oil recently confessed to reserve inflation, and I suspect that others will contritely follow.
El Paso, back in the year 2000, was hissing on top of the world when the success of its energy-trading business zoomed the shares up to the mid-$70s on revenues of $57 billion. Then, less than two years later, a leak of sizable proportion ignominiously imploded EP to the $3.50-$4 level.
Today, sans its odious trading business, EP generated $6.8 billion in revenues – gathering, transporting, processing and storing the messy stuff. EP also explores for natural gas and oil, participates in the power-generation business in a small but profitable manner, develops and operates energy infrastructure facilities and legitimately engages in (very surgically and sanely) the marketing of energy commodities.
Now the reduction of EP’s energy reserves by 1.8 trillion cubic feet might create an approximate one-time noncash charge to the company. While this won’t affect short-term operations, it does shorten the life of EP’s asset base. So it is imperative that management quickly discover net sources of asset growth.
This innocent misstatement, or this incorrigible lie, might bring a flurry of class-action lawsuits from sharklike lawyers and there’s little doubt that the Securities and Exchange Commission will dig its talons deep into EP. So management announced that it must delay its 10-k filing to include prior-year financial data. All these little peccadilloes have certainly put the kibosh on the stock.
When is it the best time to buy a stock? The answer is: “When nobody wants it and there’s corporate blood running in the gutter.” Well, its happening now, and EP might be (I said “might be”) a compelling 18- to 24-month speculation. In fact, I think EP could potentially double in that time.
Though EP has $23 billion in debt, management is making good progress selling assets and has nearly $4.5 billion in planned sales this year. More debt reduction via the sales of foreign properties and noncore assets are planned, which should increase free cash flow and improve EP’s lowly credit rating.
EP owns the largest natural gas pipeline in North America, which puts this company in an excellent position to benefit from increasing demand and higher prices for an inexpensive and clean-burning fuel.
EP’s paper is rated junk and certainly not a fit investment for conservative, God-fearing investors who are unable to assume significantly above-average risks in exchange for an extremely remote probability of above average gains. According to Value Line Investment Survey, EP lost a bundle in 2003 but should earn 30 cents this year and possibly 45 cents in 2005.
If I took $1 billion dollars off EP’s book value today, the stock is trading plus or minus a dime either side of book. While the dividend has been cut from 87 cents in 2002, the current 16 cents yields 2.2 percent. I think within the next few years, EP will pull itself up from the mud and return to a semblance of its former self.
So, yes, I think EP is here to stay and a 1,500-share purchase of the common could possibly double in the coming two years. The shares appear to have alluring and compelling potential for venturesome investors such as you.
I must caution you that its weak financials and difficult earnings predictability – plus potentially more bad news- are among the negatives that could implode the stock again. So go and do the deed and I hope you’re successful.
However, there may be some readers who would like to speculate and earn an attractive yield while they’re waiting for the eventual payoff. They can consider El Paso Trust Convertible Preferred C (EP+C-$28.75). The $2.375 dividend on this convertible preferred gives the owners a 8.26 percent return while they wait for good things to happen.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr. Berko: My broker has a very bullish report on First American. My broker sent me a copy of his research report and wants me to buy 400 shares for my pension account. I’m reluctant to do so because the stock has had such a strong run-up in the past dozen years and I can’t get my arms around the company to get a good feel for it. Please advise me.
W.L.
Boca Raton, Fla.
Dear W.L.: First American Corp. (FAF-$28.04), founded in 1889 and home-ported in beautiful Santa Ana, Calif., had revenues of $6.2 billion last year. FAF’s businesses are divided into two primary categories: Financial Services and Information Technology.
The Financial Services group provides title insurance (probably one of the most expensive and biggest rip-offs in the United States, in which FAF owns 23 percent share of the market), specialty insurance, property and casualty, home warranties, tax-deferred exchanges, escrow services, equity loans plus trust and thrift services.
FAF’s Information Technology group collects, collates, provides and prepares mortgage information, property data, credit records, tax monitoring, flood certification, default management services, mortgage document preparation and other real-estate-related services. Financial Services accounted for 54 percent of pretax income. Information Technology generated 46 percent of FAF’s pretax income.
FAF is a midcap company with $640 million in long-term debt, 80 million shares outstanding and a fabulous record of revenues and net income growth since 2000. In 2000, FAF had $2.9 billion in revenues and posted earnings of $1.24 a share. In the next three years, revenues grew to $3.7 billion, then to $4.7 billion and $6.2 billion in 2003. Earnings grew as nicely from $2.27 in 2001 to $2.92 and finally to $5.22 last year.
FAF conducts its business in 49 states plus the District of Columbia and plans to increase its business via strategic acquisitions. So far this year, FAF bought Modern Abstract, then Public Abstract Co., then U.D. Registry, then Resident Screening, then Infocheck in Canada, then Baker, Brinkley & Pierce, then Background Information Systems and then MRVS Inc. That’s eight acquisitions by April of this year. In the following couple of years, if FAF continues its acquisition binge, its reach may exceed that of the Holy Roman Empire.
As a result of these and past acquisitions, the suits on Wall Street expect FAF could grow its title insurance business by 10 percent to 12 percent annually. As a result of these acquisitions, FAF’s people process more than 41 percent of property (residential and commercial) defaults. Management believes that this profitable business will partially mitigate the interest rate cyclicality of the title business.
Because of its aggressive acquisitions, FAF owns the largest U.S. property database that keeps records on more than 90 percent of all U.S. real estate purchases and sales. FAF also owns the largest title database in the world, containing more than 460 million individual records. Finally, FAF ranks No. 3 in the country as the screener of choice to verify motor vehicle records and employee (for potential hires) background information. Wow, what a gold mine of private and personal information. I doubt that the FBI has comparable resources.
To complement all those acquisitions, FAF’s debt is only 10 percent of its assets. Return on equity is more than 16 percent, operating earnings exceed interest requirements by twenty-fivefold, there’s $14 of cash for each share outstanding and FAF has claims paying resources of $5 for every dollar of potential claims. That’s mighty strong.
While FAF appears to be a veritable Golconda of data and while its shares have appreciated almost 1,300 percent since President George W. Bush took office in 1991 (versus 300 percent for the Standard & Poor’s Index), it may be time for this company’s share price to take a breather.
FAF’s title insurance business comprises more than 50 percent of total revenues. I suspect, as do many observers wiser than I, that this business segment may experience a significant decline in activity over the next few years. Yes, FAF may continue its buying binge, but I fear the returns from these acquisitions may not be as rich in the future as they have been in the past. And while FAF earned $5.22 a share in 2003 the suits are expecting $3.60 to $3.80 this year and $3.20 to $3.50 in 2005. The stock trades at 8.5 times 2004 earnings, which I feel may be a nudge too low. I think FAF should trade at 10 times earnings, which still doesn’t provide much upside for the shares.
I like the company. I think it has a dynamite business, a valuable franchise, superb management and it sells a product at a fair price that will always be in demand. But I would not own FAF. I think the shares, which traded between $23 and $32 in the last 12 months, appear fully priced for the next few years.
But it seems the Street strongly disagrees with me. Of the 10 analysts who follow FAF, seven have a “buy” recommendation on the stock. I hope they’re right because FAF is one heck of a classy company. And I hope they’re right because your broker’s analyst, Mike Vinciquerra, seems like a very nice guy.
However, unless there’s a potential buyout offer on the table, I have no interest in owing FAF at this price. But if the stock dips down to the $19-$21 level, then I’d write a check for 400 shares.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr. Berko: I bought 100 shares of Dow Jones & Co. at $76 in mid-2000 and the stock just collapsed since. I’m considering the purchase of another 100 shares at $48, which would bring my basis down to $62. Please let me know if you think this is a good idea.
T.L.
Syracuse, N.Y.
Dear T.L.: Dow Jones & Co. (DJ-$50.42) was founded in 1882 by Charles Dow, Edward Jones and Charles Bergstresser in a basement office just one block from the New York Stock Exchange. These enterprising reporters produced daily newsletters called “flimsies,” which were delivered by a messenger to subscribers in the Wall Street area.
Business was so brisk and the newsletter was so well received that in 1889, they formatted their newsletter into a four-page newspaper that debuted that July at 2 cents a paper. When Dow passed away in 1902, The Wall Street Journal had a circulation of 7,000 and Clarence Barron (who was hired in 1896) bought control of the company.
Today, DJ is a $1.5 billion publishing empire, its flagship newspaper, The Wall Street Journal, has a circulation of 1.8 million and its international edition has more than 600,000 paid subscribers. DJ also publishes Barron’s, Smart Money Magazine, the Ottaway Newspapers (19 dailies) and has more than 7,000 employees.
DJ also is a leading provider of business news for U.S. radio stations and maintains as well as licenses the Dow Jones Indexes which are used as bench marks to measure stock market and other investment performance.
But, sadly, DJ shares have not even mirrored the performance of its namesake Dow Jones Industrial Averages. DJ’s revenues have been disappointingly rocky, its earnings are terribly inconsistent while its dividend growth has been stuck in the mud for almost a decade.
Unfortunately, DJ’s net profit margins have continued to deteriorate, capital spending has withered, cash flow is stilted, book value has crashed and management’s performance has keenly disappointed many large investors. CALPERS, the world’s largest pension plan with $170 billion, is at odds with current management and has withheld votes for two members of DJ’s board while other large institutional shareholders have expressed profound disappointment with DJ’s performance to the company’s chairman and chief executive officer, Peter Kann.
Complaints, suggestions and outside ideas are futile. Management and its moribund board have been living terribly close to a banshee farm for so long that they can’t hear investors screaming. Candidly, they don’t have to. The company is controlled by the descendants of Clarence Barron so that DJ’s officers and directors have more than 70 percent of the voting rights via a special Class B common stock worth 10 votes per share. Due to this relationship, the interests of outside shareholders, like you, come in second to the personal interest of the Barron family.
There is no way I’d be comfortable owning a company the majority shares of which are voted by a clan of kith and kin. Certainly other large newspaper groups like Knight-Ridder, Gannett, The Tribune, McClatchy, Scripps, Pulitzer, News Corp. and Lee Enterprises have enormously superior records of revenues and earnings and far better stock performances. I would be even more uncomfortable owning the stock of a company trading at 35 times expected 2004 earnings (Value Line’s estimate) of $1.35 a share. That’s nearly 75 percent higher than the average price-earnings ratios than the above eight publishers.
I’m sorry that you paid $76 a share for DJ in mid-2000 but I don’t see the stock returning to the $70 area in the coming 12 to 18 months. I do know that management was embarrassed into effecting tighter cost controls, which have been moderately effective. I know that DJ has greatly expanded its color print capacity and that color advertising space has grown by 31 percent. And I know that management reduced employee head-count last year, so despite record-low revenues (since 1988) DJ managed to squeak a profit.
While I believe revenues may increase by 5 percent this year and that net profit margins may grow by 25 percent in 2004, I still wouldn’t buy another 100 shares of this stock.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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Dear Mr. Berko: Please give me your thoughts on 3M Co. I owned the stock in 1997 at $49 a share and sold it in 1999 at $50. I guess I just didn’t give it enough time because 3M’s revenue numbers and its earnings and dividends have gone almost straight up since and the stock now sells at $87.
I use many of their products, especially their office products, their industrial products and their communications equipment. It’s all top-quality, priced fairly and dependable. And I can’t think of a reason (unless you can) not to own 100 shares of 3M.
D.P.
Moline, Ill.
Dear D.P.: I think 3M Co. (MMM-$87) is a marvelous, profitable, successful, admired company. I think that MMM, with more than 1,000 scientists and an annual research budget exceeding $1.2 billion a year (which has produced more than 50,000 products) will continue to be a leaders in American industry and technology. And I believe a company that mass-produces “lime-yellow” traffic signs, makes Scotchguard and a salve for genital warts will continue to grow its revenues, improve its earnings and increase its dividends for a long time to come.
MMM, one of the bluest of the blue chip stocks, was founded in 1902 by five Minnesota businessmen who financed a company to mine minerals for grinding wheel abrasives. During MMM’s first calendar year in business, the company generated $6,285.22 in revenues and earned a net profit of $946.22.
Today, MMM is an $18 billion diversified technology company, headquartered in St. Paul, Minn., with manufacturing operations in 61 countries, customers in 203 countries and one of the 30 stocks that make up the Dow Jones Industrial Average. Last year, MMM generated $18.2 billion in revenues ($10.6 billion was international), reported $2.4 billion in net income and paid $1.2 billion in income taxes.
If you had bought one original share of MMM when the company came public and never sold it, you would have 3,072 shares today.
MMM’s operations are divided into seven divisions:
1. Consumer and Office, with 2003 revenues of $2.6 billion. Key products include tapes, stationery, Scotchguard and more than 600 Post-it products. Last, year this division earned $460 million.
2. Health Care generated $4 billion in 2003 revenues selling medical supplies, surgical supplies and sells branded prescription drug products related to women’s health care, cardiology, dermatology and respiratory medicine. In 2003,MMM’s Health Care division earned the company $1.03 billion. That’s a 25 percent profit margin on revenues.
3. Safety and Protection Services generated $1.93 billion in revenues making and selling respirators, protective films, retro-reflective materials, theft-protection systems, label systems, optical systems, insulation and specialty materials. This division earned MMM $437 million in 2003.
4. Industrial had $3.35 billion in revenues and earned $458 million. This division sells tapes, bonding materials and adhesives, for industrial and commercial applications.
5. Display and Graphics had $2.96 billion in revenues and earned $885 million in net income last year. Its key products include optical film and lenses for touch-screen devices and reflective materials for signs and license plates.
6. Transportation generated $1.54 billion in sales and earned $389 million. Transportation markets abrasives, adhesive foams and tapes for trucks, cars, auto repair and marine craft.
7. Electro and Communication had $1.82 billion in revenues and $255 million in earnings. This division produces connectors for electrical and telecommunication equipment and microconnectors for other electronics such as printers.
MMM’s products dot every highway, every byway, every nook, every cranny, corner, lair, alcove and shelf of almost every business in almost every town in almost every country in the world. A world without MMM is like a world without peanut butter and jelly, soccer, Bugs Bunny, the NFL, country music, marshmallows, Big Macs and bubble gum. MMM is such a unique and diversified company that its revenues, its earnings and dividends are almost impervious to inflation, recession and the economic cycle.
MMM is such a superb company with enormously capable management that most observers believe it will continue to grow its revenues from $18 billion last year to at least $25 billion by 2008. It is such a well-positioned and dynamic company that observers think it can grow its earnings from $3.02 a share last year to $4.40 by 2008.
MMM’s research department has such awesome talent that observers believe it will continue to produce compelling new products which will march MMM proudly into every new year.
MMM is one of the finest companies in the world, yet at $87 I wouldn’t touch a single share. MMM trades at a daredevil price-earnings ratio of 28, which in my opinion, is patently ridiculous. In fact, that’s a higher P/E than Microsoft, Intel, Oracle and Storage Technology. MMM’s average P/E during the past 18 years is a much more reasonable 20.5. And there’s nothing in MMM’s market basket for today or five years hence that justifies a 40 percent higher P/E.
Frankly, at $87, I’m convinced that MMM’s shares are egregiously overpriced. I know that 19 of the 25 suits on the Street who follow MMM rank it as a “buy,” and I suspect that those 19 are being paid for their analyses. I’d buy MMM at $68 to $72, but certainly not at $87.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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