Q–Please explain what a tracking stock is. I own two stocks that now have these tracking stocks.
A–A tracking stock is a separate class of shares issued by a company that wants to “unlock the value” in one of its business divisions. It typically is a division growing faster than the rest of the firm, with Internet and wireless businesses popular recent examples.
Unlike a spinoff, in which a company actually divests a subsidiary, the tracking stock doesn’t represent a separate entity. The parent firm simply removes the unit’s bookkeeping from the main company’s financials so the new stock “tracks” the results of the new business.
The first tracking stock was issued in the early 1980s and there are now about two dozen. One-third of these have been initiated in the past two years as the telecommunications industry has undergone numerous mergers.
For the most part, tracking stocks haven’t been outstanding performers or overall good deals for their shareholders.
“The owner of a tracking stock is a second-class citizen because your voting rights, if any, are very limited and you own the performance of the division rather than its assets,” explained Mark Minichiello, vice president of the Spin-Off Advisors investment research and money-management firm in Chicago. The management of the company, on the other hand, can have its cake and eat it, too, because it raises money without giving up assets or control.”
If you do buy a tracking stock, make sure it’s one with a hot product and with as much autonomy from its parent as possible.
Q–I own shares of Allstate Corp. Should I hold or sell?
A–Established in 1931, this insurance giant known for its “good hands people” has been undergoing fundamental change in 2000. Its restructuring has included cutting 4,000 non-agent jobs, turning all of its agents into independent contractors and actively buying back shares.
The property-casualty, life and car insurance company has also expanded its capacity to handle customer business through the Internet, thanks to an extensive upgrading of its computer system that will also boost its direct marketing efforts.
Shares of Allstate have gained 39 percent this year, making up for last year’s 36 percent decline. Some analysts believe the company’s franchise value and potential as a takeover target are still not adequately reflected in its stock price.
Allstate’s shares merit a “buy” rating from the Wall Street analysts tracking it, according to the Boston-based First Call research firm. That consists of 12 “strong buys,” three “buys” and eight “holds.”
Earnings for the firm rose 31 percent in the third quarter, due to strong growth in its major lines and fewer losses tied to catastrophes. Its earnings are expected to decline 4 percent for the year and rise 15 percent next year. The expected five-year annualized growth rate is 11 percent.
Allstate bought American Heritage Life Investment Corp. for $1.1 billion late last year and has undertaken a joint venture in variable life insurance products with Putnam Investments.
Q–I had a retirement certificate of deposit worth $138,000. The investment representative at my bank suggested that I take out $38,000 and invest it in Putnam Equity Income Fund. I followed his advice, and at the end of a year the fund was losing money. A bank vice president then suggested that I diversify and invest in several other Putnam funds, including Voyager Fund. What’s your opinion of Putnam Voyager?
A. Since $38,000 was a big chunk of your overall holdings, the initial bank representative you dealt with might have recommended that you spread it among several funds with varied goals instead of stashing it all in one fund. However, even belated diversification makes sense.
Putnam Equity Income Fund is a large-capitalization value fund, while Putnam Voyager Fund is a large-cap growth fund. They are two different animals that should perform well at different times.
The $43 billion Putnam Voyager Fund is down 11 percent in 2000 to rank near the lowest quartile of large-cap growth funds due to poor results from semiconductor stocks. Yet it gained 28 percent over the past 12 months to rank in the top one-third of its peers and its three-year annualized return of 20 percent places it in the top half of its category.
“Putnam Voyager could be a good core growth holding for your portfolio,” advised Kelli Stebel, equity fund analyst with the Morningstar Mutual Funds investment advisory. “It’s not a superaggressive fund that’s going to go out on a big limb, but it definitely has some bite to it.”
More than one-third of Voyager’s portfolio is in technology, followed by health care and financials. Its top holdings are Viacom Inc. Class B shares, General Electric, Pfizer, Cisco Systems, Maxim Integrated Products, Linear Technology, Oracle, Citigroup and Tyco International.
The fund’s Class A shares require a 4.75 percent front-end “load” (sales charge), while Class B shares have a declining back-end load, and Class C shares have a level load. The minimum initial investment is $500.
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Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, “Successful Investing,” 98 Henry St., P.M.D. 183, Brooklyn, N.Y. 11201, or by e-mail at successinv@aol.com.
