Q–Several years ago, we bought 200 shares of Phelps Dodge Corp. We had watched the stock price rise, but have lately seen it decline. What’s the situation? Should we hang on or hang up?
A–Low copper prices due to a market surplus have taken some luster from the nation’s largest copper miner.
Phelps Dodge’s fourth-quarter profits tumbled 56 percent from a year ago and missed Wall Street estimates by 44 cents a share. Contributing to its woes were a charge for environmental reserves and operational problems at two mining facilities.
The Wall Street consensus on the company’s stock is currently a “hold,” according to the I/B/E/S International research firm. That includes one “strong buy,” seven “buys,” nine “holds” and three “sells.”
The worries aren’t over yet. Earnings are projected to decline 39 percent this year, versus a 7 percent growth rate for the overall non-ferrous metals mining industry. Chief executive Douglas Yearley expects that low copper prices may squeeze operating cash flow this year and slow down existing growth initiatives.
Next year’s estimated earnings decline of 6 percent compares to a 32 percent industry gain. Longer term, the company’s median five-year growth rate is expected to be just over 10 percent.
“Investors must realize that because the depressed price of copper will depress Phelps Dodge earnings and asset values, everything must be viewed on a forward-looking basis,” stressed Peter Crays, manager of U.S. research for I/B/E/S. “The stock has actually done relatively well in light of the earnings decline.”
Q–What’s your opinion of the Berger 100 Fund? We’re concerned about performance of the Berger funds since Bill Berger stepped down from active management.
A–There’s been some overlap in fund management over the years, so it’s hard to blame one person for all past successes or recent failures.
Thoughtful, bearded Bill Berger, featured in the mutual fund company’s commercials, stepped down from active involvement in the Berger 100 Fund in 1994. As you noted, performance has since faltered.
Rodney Linafelter, a day-to-day manager of the fund from late 1990 to February 1997, made good bets in the early 1990s, but then lost his touch. Patrick Adams, formerly of the Founders Growth Fund, took over the fund last year and his results in repositioning it have yet to show impressive results.
The $1.8 billion Berger 100 Fund gained 8.27 percent over the past 12 months to rank in the lower half of all midcap growth funds. Its three-year annualized return of 17.76 percent placed in the lowest quartile of its peers.
“Berger 100 had owned some rather arcane stocks in sectors that were largely ignored as the big-cap stock rally began in 1995,” related Michael Stout, equity fund analyst with the Morningstar Mutual Funds investment advisory.
Manager Adams is moving the fund more mainstream and is unlikely to make major sector bets, Stout expects.
This “no-load” (no initial sales charge) fund based in Denver requires a $2,000 minimum initial investment.
Q–I own 216 shares of ITT Corp. I received many requests during the proxy fight leading up to the 1997 stockholder vote in favor of merging with Starwood Hotels & Resorts. Most recently, there was a February meeting to consider an amended merger plan. How does one make a decision in one’s best interest with so little knowledge and understanding of all these proposals?
A–Count your blessings–and profits.
Wall Street and investors alike deemed the winning “white knight” Starwood bid of $10.2 billion for ITT to be superior to that of hostile suitor Hilton Hotels. The Feb. 12 shareholder vote you mentioned wound up with 88.7 million votes cast for the Starwood deal and 1.6 million against, with 426,820 abstaining.
This transaction to create the world’s largest hotel concern benefits shareholders because “we got the most money we could get,” explained Bonnie Smith, co-portfolio manager of the $460 million Merger Fund in Valhalla, N.Y., which buys potential merger stocks.
Though the inevitable flurry of complicated information can be confusing, an investor must carefully study as much as possible when merger opportunities appear.
Examine all materials you receive from the companies involved and make a point to follow the explanations in the financial press of the various merger moves. Some deals don’t attract rival bids, but others, such as the one involving ITT, are high-stakes affairs.
Try your best to be an informed shareholder. A pure cash deal is easiest to assess, while a stock deal requires consideration of a company’s “true” value. Either way, there’s a good chance that you as a shareholder in an acquired company may have a lot to smile about.
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Andrew Leckey, an anchor on the CNBC financial cable television network, answers questions only through the column. Address inquiries to Andrew Leckey, “Successful Investing,” Suite 367, 76 N. Maple Ave., Ridgewood, N.J. 07450 or by e-mail at successinv@aol.com.
