Shining light on an investment

Answering the Mail

July 15, 1992|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Q. My financial planner, who is a risk-taker, suggests I invest in something called Shadow Stock Fund. What can you tell me about this obscure recommendation?

A. This fund truly revels in the obscure.

Shadow Stock Fund of Kansas City, Mo., favors unpopular small-capitalization companies held by few large institutions and seldom followed by Wall Street.

It defines small stocks as those in the smallest quarter of the New York, American and over-the-counter markets.

This no-load (no initial sales charge) fund rose 40 percent last year, nearly 10 percent better than the Standard & Poors 500.

This year it's up 6 percent, again better than the S&P.

However, as you alluded to in your evaluation of your financial planner, it carries considerable risk.

"Shadow Stock Fund is risky because it uses passive investing methods, meaning that any and all stocks which meet its criteria go into the fund," said Stephanie Palmer, analyst with the Morningstar Inc. fund advisory.

"All companies must have earnings of at least $100 million over the last three years, and in a year that they post a loss they are dropped."

That philosophy has resulted in a long-term record which doesn't measure up to some better-known small-capitalization funds, Ms. Palmer said.

Q. What are your thoughts on Compaq Computer Corp.? Every time I turn around, the company is cutting prices. Should I stick with it or move on to greener pastures?

A. You may have spent enough time grazing in this pasture.

Stock of Compaq Computer (around $25 a share, New York Stock Exchange) is all right if you view it as a trading vehicle, but long-term prospects are suspect, said Bruce Lupatkin, analyst with Hambrecht & Quist.

Once a darling of Wall Street, Compaq last year was rocked by price-cutting wars, had problems making deliveries of its laptop computers and saw its chief executive officer abruptly ousted by the board.

Making matters worse, this year Compaq faces much more severe price-cutting with a lot of players involved.

Dell Computer recently announced a new line of low-cost personal computers priced well below those of Compaq.

Digital Equipment announced 20 percent price cuts on its low-end units.

"Compaq's stock price enjoyed upswings when it announced super-saving prices, but now the stock is oversold and it's basically just a trading opportunity if that's what you want," said Mr. Lupatkin, who believes slashing prices makes the future difficult. "This company doesn't have a long-term strategy."

Q. I like to hold stocks long-term, since my wife and I are not in need of income at this point in our lives. Is Bristol-Myers Squibb a good long-term hold?

A. Pharmaceutical and household product giant Bristol-Myers Squibb (around $66, NYSE) is a good long-term hold, but only so-so near-term, said Steve Gerber, analyst with Oppenheimer & Co.

Because it did so well last year, Bristol-Myers Squibb faces tough earnings comparisons and it hasn't exactly been boasting about prospects.

"Nonetheless, this is a premier company with excellent prospects, such as its joint venture in Japan that in 1994 will manufacture vitamins and medications," Mr. Gerber said.

"Another significant venture, its $100 million investment in the Taxol anti-cancer compound could easily lead to returns of more than $500 million."

Q. I am buying a home and have spent $500 on a home and land inspection. I intend to spend another $300 on an appraisal for mortgage purposes. Can I deduct these expenses on my tax return this year?

A. Those fees, such as appraisal fees and inspection fees, are not deductible on your personal tax return, said Robert Greisman, tax partner with Grant Thornton.

"Such costs become part of the home's basis, meaning you can add these costs to determine the gain on the home once you sell it," Mr. Greisman said.

"You really can view this as a tax benefit, since it minimizes your basis."

Q. I'm searching for higher returns on my savings. Duff & Phelps Utilities Income has been suggested to me as a good income investment. What is your opinion? I'm very conservative.

A. Duff & Phelps Utilities Income (around $10, NYSE), a closed-end fund that buys stocks and bonds of utility companies, is an excellent conservative income investment, said Richard Wholey of Chicago-based Wayne Hummer & Co.

Dividends and interest are passed on to Duff & Phelps Utilities Income shareholders on a monthly basis, and can be reinvested or paid in cash.

The dividend currently provides a 7 percent yield.

"Although an attractive investment, you might defer purchasing shares for a while because they're trading at a premium to their net asset value," Mr. Wholey said. "Track this closed-end fund's net asset value in the newspaper and make your purchase when you see its premium shrink."

Q. I have noticed that America West Airlines hasn't been trading for a few months. Has it been removed, due to the company being in Chapter 11 and trying to reorganize?

A. America West Airlines (around 37 cents, Pacific Stock Exchange) has been in Chapter 11 bankruptcy since the middle of last year and says it's confident it will emerge successfully.

The carrier's progress has been set back by the recent airline fare wars, said Sharon Conway, based in Chicago with A.G. Edwards & Sons Inc.

America West and Continental Airlines have filed suit against the parent company of American Airlines, claiming it has engaged in predatory pricing to put them out of business.

"If you're still on board, you should hold, realizing it's either up or out for this carrier," Ms. Conway said. "It faces an uphill battle, but it's in there fighting."

Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, Chicago Tribune, 435 N Michigan Ave., Chicago, Ill. 60611.

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