Q. Now that Google Inc. is off and running as a public company, what is the outlook for its stock?
— S.S., via the Internet
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A. The $1.16 billion cash infusion from the highly publicized initial public offering of this 6-year-old Internet search engine should pay big dividends.
This name-brand company, which spent $91 million on research and development in 2003, is opening a research and development center in Japan. This is its third such center outside the U.S..
Besides its strong technology base and international potential, it holds a leading position in an online search industry that has outstanding prospects. It is a real success story that traces back to founders Larry Page and Sergey Brin starting the firm in a garage in 1998, two years before it became the Web’s largest search engine.
Yet, despite its rapidly growing sales and earnings, Google (GOOG) isn’t very diversified. It still draws three-fourths of its business from ads appearing next to search results, and the growth of that market has been slowing.
While its new financial war chest bodes well for expansion and acquisitions, such steps are not assured of success. Furthermore, the Internet is still a young industry in which rivals can appear without warning, using their fresh new ideas to successfully invade the turf of more established companies.
The price of a glamor tech stock such as Google is often tied more to hopes and dreams than reality. There’s also the possibility of the market being flooded with Google stock over the next six months as various IPO lockup expirations occur, making the stock price highly volatile and increasing the possibility of it declining.
The consensus analyst rating on Google’s stock is a “hold,” according to the Boston-based First Call research firm. That consists of two “buys,” one “hold” and one “strong sell.”
Google earnings are expected to increase 73 percent next year, versus the 37 percent gain forecast for the computer services industry, according to First Call. Its projected five-year annualized return of 61 percent compares with 14 percent for its peers.
Q. What is your opinion of Oppenheimer Main Street Fund? I’ve owned the fund for several years, but I’m considering selling.
C.T., via the Internet
A. Don’t be hasty. While it isn’t flashy, this respected quantitative fund is based on computer models that its investment team developed over three decades. The team founder and also this fund’s lead manager from 1998 to 2003 was Chuck Albers, an industry legend who began to select stock using computers in the early 1970s.
Albers retired last year and Nikolaos Monoyios, who had worked with him since the late 1970s, became lead manager. Another experienced professional, co-manager Marc Reinganum, has advised the team for more than a decade.
The $7.6 billion Oppenheimer Main Street Fund (MSIGX) gained 12 percent over the past 12 months and had a three-year annualized return of 0.20 percent. Both of these results rank in the upper one-fourth of all large growth and value funds.
The fund has broad diversification and its criteria include quality, valuation, momentum, stock buybacks and mergers.
Its goal has been to modestly beat the performance of the Standard & Poor’s 500 index, which it has generally done despite some stumbles. It has shifted in recent years from small-cap to larger-cap stocks, and it will take some time to be sure that this shift will continue the fund’s past results.
“Oppenheimer Main Street Fund is a good core fund for an investor as an alternative to an S&P 500 because over periods of time it has beaten that index,” said David Kathman, analyst with Morningstar Inc. in Chicago. “It primarily invests in large-cap stocks and will shift around between growth and value according to where its computer models say the best possible returns will be.”
Oppenheimer Main Street Fund has a 5.75 percent “load” (sales charge) and a minimum initial investment of $1,000. Its annual expense ratio of 0.97 percent is at the low end of similar funds.
Q. Why do some say it’s bad for a mutual fund to get too big? Why do some funds close when they reach a certain size?
J.P., via the Internet
A. Running a much larger fund is a bigger job, and not all fund companies have the resources to do it well.
A fund usually grows to a significant asset size because it has increased the value of its portfolio through wise investments and has attracted considerable new money from investors who admire its success. That’s a definite plus.
Yet all the new money flowing in forces the portfolio manager to invest in more stocks. This particularly causes problems for a fund emphasizing small-company stocks because it becomes difficult to find time and staff to do research required to fully understand these firms. In addition, by law a fund can’t own more than 10 percent of a firm’s stock.
A large-cap manager has an easier time because big companies have more shares outstanding and greater market value, so it’s possible to invest more money in fewer shares.
“Managers of a fund that is closing to new investors are . . . saying that it’s getting a little hard for them to find stocks they like enough to invest in,” said Mark Salzinger, publisher of The No-Load Fund Investor (www.sheldonjacobs.com) in Irvington-on-Hudson, N.Y. “Some funds never reopen, but often you’ll see funds stay closed a year or two until prices in its favorite sector have fallen and there are solid investment opportunities again.”
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Andrew Leckey is a Tribune Media Services columnist. E-mail him at [email protected].