| |
I’M AWAITING YOUR CALL
By Donald Pearson
09/05/2002
I thought I’d try writing rather than calling, because it gives you an opportunity to think about what you want to say before you call me. Everyone is, or should be, re-evaluating their holdings and making changes to improve their positions. You should be doing this too. Portfolio re-evaluating is always thought to be like cleaning out the garage, or cleaning out a closet. (I know I should be doing it, but I’ll put it off and do it another day.) If you haven’t gotten to it yet, let’s make today the day.
The S&P 500 just redid their portfolio by removing seven companies and replacing them with a new select group of its choice. You probably know this bear market is the worst we have endured since the 1938-42 era and could very well be at the bottom. The S&P 500 is currently 45% off its previous high and making what it believes are the necessary changes to prosper as the market prepares itself for a new era. Even though a record was set with another $49 billion being taken out of mutual funds by investors in July, we could also view this period as an opportunity. We could be looking at many good companies on sale today, available to us at prices not seen for several years.
With the market beginning to hold now and continuing its move sideways, it becomes not only critical to have all of your holdings properly diversified, you should have each and every fund and individual stock analyzed. So many things continue to change because of mergers, or product lines changing, or simply companies not meeting expectations. A sector that was in favor may not be
any longer. Today it is common for many mutual funds to be merged with another or the fund manager changed. You could do this project yourself, but I would rather see you make that call and have us do it for you. It is a service we provide, and we do not charge for it. We have many more resources available, and this should give us, along with our years of experience, a better opportunity to reach the right decision for you.
As you can see, today even honest evaluations can be mixed and confusing. In the Tampa Tribune this week A.G. Edward’s analyst downgraded Teco Electric to a “sell,” while the analyst at W. Baird & Co. rated it a “strong buy.” A group of eight other analysts rate it as a “hold” or a “buy.” The bottom line is things are not always what they appear to be, and you may no longer have what you thought you did when you added it to your portfolio. I hate to bring this up but you are not getting any younger and your needs are changing too. We speak about this often, but I know you haven’t moved on it yet as you told me you would.
This morning on the radio, as I am riding to an appointment, the news is about Nortel cutting another 7,000 jobs and missing their earnings by 10% after stating last week they would be flat. Their company stock is down 86% year to date, and appears to be going down further and pulling the whole sector down too. Lucent was around $5.00 three months ago and sells today around $1.80. This sector was one in which everyone should have owned stock three years ago. I hope you sold it last year as we advised. We annualized a portfolio for one of our clients about six months ago and one of the holdings in the portfolio was WorldCom. We made many recommendations for
the different holdings, but the WorldCom recommendation was a strong sell as we had sold all of ours about fourteen months ago. This is what we mean by different sectors falling in and out of favor. It is also our opinion, the S&P 500 index is still top-heavy with popular, overvalued stocks. We have been favoring the financial sector, and our top three holdings today are all in this sector: East West Bank (EWBC), Doral Financial (DORL), and WHI Holding (WHI).
Remember the objective: growth, performance, & safety! If you do manage a portfolio yourself, pay particular attention to our recommendations on page 8. We believe these selections will give you income and growth opportunity with the least exposure to risk. August/September is a slow time for earnings reporting, and our research department headed by Walter Pearson would be pleased to help you with a portfolio analyzation. I await your call.
INFLATED EARNINGS
By Donald Pearson
07/04/2002
For those of you who are doing your own stock selecting, or for those of you who have an additional portfolio that you manage yourself, my message to you is be very careful!
Today we are faced with another new obstacle when attempting to select the right stocks for our portfolios. It is companies willing to do almost anything they can get away with to make their numbers for reporting purposes. In some cases these numbers are massaged or inflated by the “corporate villain.” This is someone within the system who has the position needed to work the numbers effectively. This was done in many cases because of the stock options and bonuses top executives were in a position to make. It was a huge incentive to boost near-term share prices regardless of long-term consequences. It is hard to measure the volume of corporate shenanigans, but I can tell you that more than 150 companies restated their earnings in each of the past three years, an acknowledgment that they had misinformed investors. That is more than triple the number in the early 1990s.
If you have been reading the papers lately, you know exactly what I’m referring too. Here are a few examples of companies that have impacted Wall Street along with your portfolio and mine. WorldCom, the second biggest long distance company, revealed it inflated its 2001 and first-quarter 2002 earnings by $3.8 billion. What does this mean to the real people? 17,000 jobs gone immediately and a stock that many pinned their hopes on today is worth almost nothing.
Rite Aid executives, three to be exact, were recently indicted for falsifying books and inflating profits by $1.6 billion, forcing the biggest restatement of corporate earnings in U.S. history.
ImClone’s chief executive officer was recently arraigned on conspiracy to commit securities fraud. The charge was insider trading, with family members selling over $10 million worth of stock because its cancer drug would be rejected. Adelphia failed to disclose $3.1 billion in loans and guarantees. Enron improperly inflated earnings and hid debt. Tyco International had many of the same issues, and now the former chief is being charged with a long list of alleged crimes.
I could fill this page with many more as our newspapers are now running articles almost every day. The real news though is the impact this has upon the stock many of us own. The stock prices for all of these companies are immediately affected when these types of events take place. Many were thought to be buys in today’s market until the news hit the street. In many cases this caused a 40%, 60%, or more immediate reduction in the price of the stock. As you’ve seen with Enron and others, it can also be far more disastrous.
There is some satisfaction knowing the Securities and Exchange Commission has proposed creating a private sector board to oversee the accounting industry and discipline auditors, replacing the current system in which the industry largely polices itself. Something must be done immediately because of a loss of investor confidence in public companies and their financial statements. It’s too soon to give you a lot of hope with how this board will operate, but I can tell you inspite of these problems there are still many companies hitting new highs every day. It is more important than ever to really do your homework before selecting a stock for your portfolio. Look beyond the glitter of a company’s press releases and brochures. Get the facts!
Our CD Buster that can be seen on our web site is currently over 12% for the year. This is a combination of our growth & income stocks selected in January and February. You can find two growth and income stocks on Page 8 every month. It wouldn’t be a bad idea to focus here until these uncertain times become a little clearer. These growth and income selections are companies that have attractive yields with what we believe to be above average growth potential. These are also chosen for those requiring less risk. Currently all of the stocks selected are up year-to-date with the exception of one. Although any of these selected CD Buster stocks could lose money, it was built using a very conservative strategy. Phillip Morris is down in this portfolio and only strengthens the argument for diversification. Phillip Morris is a very good company that should be on the positive side by year-end.
RATING THE RATING!
By Donald Pearson
06/05/2002
The bogus ratings case that has covered the financial papers for months has been particularly interesting to me as I watched it wind down to where someone or something had to give. For those who may not be familiar with the case, I can sum it up in a very few words:
According to Attorney General Eliot Spitzer of New York, analysts were rating stocks favorably for personal gains while behind the scenes, unbeknownst to investors not privileged to the information analysts were relaying to each other, were the stocks true, considerably lower, performance and expectations. Last month Spritzer stunned the financial world by releasing subpoenaed e-mail where Merrill Lynch analysts disparaged stocks that the company was publicly recommending, calling them “junk,” “crap,” “dog,” and “disaster.”
If twenty percent of the investors today select stocks for themselves, and most of them rely upon analyst recommendations as a major part of their decision making, how much would one guess these gentlemen have cost us? Fortunately for our clients and ourselves, our company has put very little weight into analysts’ recommendations. We have felt for years that their mission was to improve their company and their position within their company, for what I call long-range job security. It is not my intent to single out one firm for this travesty. I understand from all of the newspaper articles that I’m reading today that several other Wall Street firms have also been, or will soon be, subpoenaed. The firms named in the Tampa paper are: Morgan Stanley Dean Witter & Co., Credit Suisse First Boston, the Salomon Smith Barney unit of Citigroup Inc., Lehman Brothers Inc., Bear Sterns Cos., UBS Warburg, and JP Morgan Chase & Co.
An article in the Tampa Tribune on May 24 states that security regulators from thirty other states have now joined the task force investigation. According to an article written in Investors Business Daily (5/17/02), Wall Street analysts rated only 3% of stocks as a “sell” last year. This occurred in spite of another year of poor performances by so many. As time continues I have to believe that other firms under subpoena may possibly meet a similar fate as that of Merrill Lynch. I am disappointed in the system when I read statements being made by Merrill Lynch that say, “The settlement represents neither evidence or admission of wrongdoing or liability.” Even though the company apologized and agreed to pay a fine of $100 million, it becomes difficult for me to think tomorrow I can believe what they write.
Many of the people involved here are in a very difficult position to say the least. Investment banking fees generated when firms help companies issue stock, obtain financing, or advise them on mergers and acquisitions far outstrip other sources of revenue on Wall Street. Several firms are known to tie their analysts’ pay directly to their contribution to investment banking revenue. I guess it would be hard for anyone to do the job objectively under these guidelines.
An article in last week’s “Investor’s Corner” (front page) of the Investors Business Daily newspaper said, “Act on a stock’s movement, not on Wall Street’s rating. The best way to deal with analyst ratings is to ignore them.” Whichever route you choose to take with this, it’s comforting to know the whole industry is going to redefine their guidelines for selecting. Standard & Poor has already introduced a new benchmark designed to more accurately gauge corporate earnings. Under the new measure, the 10,000 U.S. companies analyzed by S&P will have some revenue stripped away that they previously used to boost profits, such as pension fund investment gains. Stock options that corporations typically grant to executives will also be deducted from per share earnings. Already in the news are changes Merrill Lynch will make to try to eliminate the problem. Charles Schwab has put a plan of action in place, and Chicago-based, Morningstar Inc., has stated that starting in July they will overhaul their system for rating mutual funds.
The new format will eliminate category rating entirely. While still using the star rating system, they will try to put a better rating to those stocks and mutual funds that are performing well while at the same time evaluating performance and risk differently. You will have to make your own decision as to the value and credibility of each as you begin to read the changes presented by them.
All of this activity won’t make any difference to us because we do our own research for each stock. We have always felt our system of evaluating and selecting was far superior and we have no other agenda to meet. After all, we at Pearson Capital are not obligated to any company, brokerage house or firm for stock selection approval. One of the reasons we have always been opponents of mutual funds or brokerage house representatives is simply what’s in the news now. We select a stock on it merits only. Our commitment is to you and all of our many clients. We are not your broker or your analyst. We are, simply said, your PARTNER! If we can make your account grow by 50-100% over time, our 1% annual fee also grows. This can be done in some cases without trading, or minimal trading, after the original portfolio is built.
We can do what large investment firms cannot do. We can create a customized for you portfolio that you cannot get with a mutual fund. We can buy the same stocks that are in mutual funds that are the top performers, and eliminate the ones that are not, and call it “Your Personalized Wealth Account.” (More about this type of account is available on our website.) We don’t have to select or recommend stocks in our Investment Letter that we wouldn’t buy for every member of our family. When we buy, we buy first for our clients, second for our family members, and last for my father’s and my personal accounts. Our portfolios are made up of the same stocks we buy for our clients, but often a stock has moved up before we get the opportunity to purchase it for our own account. This is what we do, and we will not be changing our way of doing business.
WHAT IS YOUR CHOICE GOING TO BE?
By Donald Pearson
03/01/2002
Last month I explained how to outperform the CD, and this month I would like to help everyone develop a plan that will see this strategy through.
First, you have to make a commitment to yourself that this plan will be well thought through before it is implemented. Once it is formulated, it is imperative that it is put in writing and placed somewhere it can be viewed often. Why do we do this? All investors, yes I said all investors, allow their emotions to become involved thus allowing fear and greed to prosper. As difficult as it may seem in these very challenging times, by staying the course during market corrections investors have been able to ride out a crisis and profit in the long run. A change should be done only when market conditions dictate a change should be implemented. This market has been as is for two years now. If we have a good plan in place, we should be holding to our strategy.
Before I outline our formula for getting the job done, my personal recommendation is to hire an expert who has a great deal of experience and a proven track record. Call us, or call someone else, and ask the tough questions that give you a feeling of confidence with the firm you select. Consider asking about such things as the cost to you for trading, fees, capital gains, the firm’s strategies, and how they will meet your objectives.
It is my opinion one cannot invest the time necessary to research stocks today. All you have to do to get the picture is read the results of many mutual funds that do have the time and the resources that you do not have. Last week I spent two full days in Orlando, Florida, at seminars and conventions learning as much as I could about new software opportunities and new ideas, simply to see if some, or even one, piece of information could help us improve our researching formula to gain an edge. At the same time our research department, which operates six days a week, was hard at work. At PCI we purchase a great deal of material from several of the leading research companies on a daily, weekly, and monthly basis—companies such as Value Line, Standard & Poor, Morningstar, and Investment Business Daily. Unless you truly love the challenge of finding quality stocks, do yourself a favor and pass on the responsibility. Give it to the pro! My father has the best quotation for describing “the pro”—”He’s the one who makes fewer mistakes than you do.”
If you are taking my advice, you can pass on the rest of this article. You can now invest this time in the things you have always wanted to do. If you choose to go on, our formula and strategy is to simply buy the companies that display outstanding growth potential in all sectors and to pay particular interest to those that have increasing dividends and earnings and to those that continue to outperform others in their sector. Warren Buffet never purchased a company in a sector that he didn't fully understand. He wanted it to be the best at what it did. With today’s technology one can obtain so much information in a very short period, but we must also be careful not to get information overload. Our current system has been modified over time and continues to get modified today.
First, we start our research process by putting every public company through our “quantitative analysis.” This simply means that every three months we chart or graph a company’s performance. This process eliminates 60% to 70% of the prospective companies for purchase, and at the same time gives us an opportunity to analyze companies we are currently holding in the portfolios.
The second part of our analogy process is to do a “fundamental analysis.” Our research department is challenged with knowing the various sectors well and the stocks that make up these sectors. Many of the stocks that do make it through the first process cannot make it here. Down side risk becomes important. As an example, a price earning ratio that is simply too high would have that stock removed from the list, the reason being our recipe for long-range growth with minimal risk exposure will not be met.
Thirdly, and equally as important, a selected stock must meet a “performance analysis.” We did not hold any Enron or K-Mart for our clients. One could at anytime make the mistake of selecting a company that does have that type of financial hardship, but a good performance analysis would greatly reduce the exposure to this. Whether it is a new start-up or a long time blue chipper, we want to know it is sound financially with great upper company management. When doing this analysis, we often find things that give us concern or doubt. Again, this eliminates many companies.
We also call a company or meet with its executives whenever the opportunity presents itself. Last week Sandra Alberti, our Publishing President, and I had the opportunity to spend a night with the top management of Pre-Paid Legal Services (PPD) at one of their company meetings. We came away from this evening more convinced than ever that we are investing for our clients in a true growth company. Today we are purchasing this stock for our clients and have been doing this for the past few years.
For those of you who have your own plan already in place I would offer the following suggestions: Continuously check your portfolio to be certain you have a good mix of small, medium, and large U.S. companies. International investing can involve additional risks but does diversify you and reduces your dependency on what happens in any particular country or market. As any market pro can tell you, the more types of assets you have in your portfolio, the less risk and volatility you may face. More and more companies are engaging in financial shenanigans to boost earnings or camouflage deteriorating business. The results can be disastrous to shareholders. You must ignore the glossy photos and upbeat pie charts at the front of the annual reports. But pay close attention to the detailed financial statements in the second half. Look for the warning signs of a stock that may be set for a precipitous decline.
And lastly, the worst thing to do in tough periods is make any rash decisions. Over time the same factors that drove the market before a crisis—earnings, interest rates, and business activities—will reassert themselves.
Good luck with your decision. I really hope to hear from you!
Member-Apollo Beach Chamber Of Commerce-Florida
Copyright © 2007 Alberti - All Rights Reserved - Privacy Policy
Webmaster
www.pearsoncapitalinc.com
www.pearsoninvestmentletter.com
^ back
to top ^
|
