Q. I bought Lucent Technologies Inc. stock in 1999 and held on. With my shares now worth a fraction of their original purchase price, are they ever going to bounce back?
C.L., via the Internet
A. The financial story of the top boss of this giant supplier of communications equipment, software and services has been considerably more upbeat than yours.
The company doubled the total compensation of Chairman and Chief Executive Patricia Russo to $13.6 million in 2004 as it posted its first profit in four years. That payout included salary, bonus and stock options.
Events since your stock purchase included the telecommunications crash, multibillion-dollar losses at Lucent and an 80 percent reduction in workforce through spinoffs and layoffs. Cost reductions and improved efficiencies remain top priorities as the firm navigates a fiercely competitive environment.
Lucent shares (LU) are down 24 percent this year, following gains of 32 percent in 2004 and 125 percent in 2003. Shareholders authorized a reverse stock split designed to boost share price, though the value of an individual’s holdings will remain the same.
The firm’s near-term future depends on the speed of the telecom industry resurgence. Emphasizing strong relationships with established firms, Lucent has won numerous contracts that include upgrading the wireless networks of Verizon, Sprint and Cingular.
Lucent boasts almost twice the market share of its nearest rival in its sector of the wireless-equipment business. Its wireless division’s profits have risen significantly, though its wireline earnings are in decline. Its research arm, Bell Labs, has more than 6,000 patents.
The positives are why Lucent might become a takeover target. But though it has lots of cash, its negatives include heavy debt obligations and rising benefit payments to pensioners, who outnumber its active workers 5-1.
Lucent stock rates a consensus “hold” from Wall Street analysts who track it, according to the Boston-based Thomson First Call research firm. That consists of three “strong buys,” two “buys,” 21 “holds,” six “sells” and one “strong sell.”
Earnings are expected to increase 21 percent for its fiscal year that ends in September, versus 16 percent forecast for the communications equipment industry. Next fiscal year’s growth rate is projected to be 18 percent compared with 19 percent for its peers. The expected five-year annualized growth rate of 5 percent trails the industrywide forecast of 15 percent.
The Communications Workers of America and the International Brotherhood of Electrical Workers approved a contract with Lucent that calls for raises of 16 percent over the next seven years.
Q. I owned shares of the Brandywine Fund in the past and sold them. Now I’m thinking of getting back in. What is your opinion of the fund?
F.R., via the Internet
A. It never wastes time in going after what it wants.
This famous well-managed fund snaps up the stock of profitable companies of any size that are growing rapidly, sells them when they reach certain target levels and then reloads.
The $3.79 billion Brandywine Fund (BRWIX) has posted a total return of 12.96 percent over the past 12 months and had a three-year annualized return of 6.71 percent. Both results rank in the upper fifth of all mid-cap growth funds.
“We really like the Brandywine Fund because it has a lot of people in research, its performance has been consistent and it is less volatile than its peers,” said Karen Papalois, analyst with Morningstar Inc. in Chicago. “But keep in mind that it trades a lot, which is an extra cost, and that it should generally be considered an aggressive holding that will complement core holdings.”
The Brandywine fund family has more than two dozen researchers for its three funds.
Well-respected William D’Alonzo has been lead portfolio manager since 1985, and all of those in its management are heavily invested in it. Foster Friess, the fund family founder and chairman, is involved in the research process and is its largest shareholder. D’Alonzo also runs larger-cap Brandywine Blue Fund and mid-cap Brandywine Advisors Fund.
As an aggressive fund, Brandywine understandably did poorly in 2001 and 2002. While it is billed as an all-cap fund, enormous asset size has dictated that its more recent growth has been in mid- and large-cap stocks. Its high portfolio turnover rate can produce significant capital-gains distributions for shareholders.
The industrial materials sector currently represents 28 percent of the fund. Other significant concentrations include business services, energy and consumer services. Largest stock holdings are Tyco International, U.S. Steel, MBNA, Campanhia Vale Do Rio Doce, Ingersoll-Rand, Phelps Dodge, Allstate, Weatherford International, Avaya and Chesapeake Energy.
This “no-load” (no sales charge) fund requires a hefty $10,000 minimum initial investment. Its annual expense ratio is 1.08 percent.
Q. My adviser has suggested that I invest in TIPS. What are the advantages and disadvantages of owning these?
M.L., via the Internet
A. Inflation is the enemy of bond investors, and Treasury inflation protected securities, or TIPS, offer protection from it.
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You’ll receive interest payments every six months and a payment of principal when the security matures. What distinguishes TIPS from other Treasuries is that coupon payments and underlying principal are automatically increased to reflect the consumer price index.
“If the inflation rate is 3 percent and the bond worth $1,000 at the beginning of the year, it is worth $1,030 at the end of the year,” said Michael Decker, senior vice president of research for the Bond Market Association in New York City. “TIPS provide protection from the risk of inflation eroding the value of your fixed-income investment.”
However, interest paid on TIPS is lower than similar Treasuries without the inflation protection. You’re liable for federal taxes on the inflation adjustment, and they aren’t as easy to trade on the open market as non-indexed Treasuries. TIPS are sold in 5-, 10- and 20-year maturities and can be purchased through the TreasuryDirect program or a broker.
Q. I hold several stocks in my portfolio that have split numerous times since I bought them. How do I figure out my cost basis?
T.C., via the Internet
A. When you own a stock that splits, take the amount you originally paid for the stock and divide it by the new number of shares.
For example, let’s say you had 100 shares and paid $1,000 for them. Your stock splits 2-for-1 and you now have 200 shares. You will therefore take the $1,000 and divide by the 200 to get a cost basis of $5 a share.
Many financial software programs do this for you automatically. You just click on “stock splits” and it automatically recalculates your cost basis. If you lack information on how many times your stock has split, your broker or accountant should be able to provide it.
“Keep in mind your stock holding period stays exactly the same when a stock splits, so you won’t wind up with some short-term and some long-term holdings,” said Martin Nissenbaum, national director of personal income tax planning for Ernst & Young in New York. “Even if you sold right after the split, the new shares will have the same long-term holding period as the older shares.”
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Andrew Leckey is a Tribune Media Services columnist. E-mail him at [email protected].