Lowe's builds a better outlook

Taking Stock

Your Money

July 25, 2004|By ANDREW LECKEY

WHAT'S the latest on Home Depot Inc. and Lowe's Cos.? Which of these retailers has the better outlook?

- N.C., via the Internet

The stock and earnings prospects of hard-charging Lowe's are held in slightly higher regard than those of Home Depot, the leader of the home improvement industry.

Though these giants have surpassed sales expectations, it hasn't been a bang-up year for the stock of either.

Both claim to be undaunted by rising interest rates, saying they won't blunt Americans' spending on their homes. Investors, however, have become more cautious. Low rates, after all, had prompted mortgage refinancings, the housing boom and strong consumer spending.

Stock of Home Depot (HD) is down about 1 percent this year after a 49-percent gain last year. Lowe's (LOW) is down 3 percent after a 48-percent gain in 2003.

Home Depot, which reported a profit of $1.1 billion in its most recent quarter, recently agreed to buy Mexico's second-largest home improvement retailer, Home Mart, for an undisclosed sum. It gains 20 outlets in that deal, which boosts its expected store openings this year to 185. It has nearly 2,000 stores and set up a development office in China.

Following criticism that Home Depot's customer service had declined, Chairman and Chief Executive Officer Robert L. Nardelli vowed to make that concern his top priority. Meanwhile, to keep its growth strong, the company has expanded its services business and targeted professional contractors.

Lowe's produced a profit of $455 million in its latest quarter, despite an accounting change that reduced earnings. Expecting to open 140 stores this year, the company has about 1,000 stores. Its aggressiveness prevented Home Depot from totally dominating the market.

Besides making inroads into profitable Home Depot regions, Lowe's has proved adept at managing expenses and raising profit margins. As it grows larger, economies of scale improve. It has had considerably more success in the appliance business than Home Depot, while stealing market share from Sears.

The consensus recommendation on Lowe's stock from analysts who track it is a "buy," according to the Thomson First Call research firm in Boston. That consists of 17 "buys" and eight "holds." Earnings are expected to rise 14 percent this year and next, compared with the specialty retailer industry projection of 18 percent for both years.

Home Depot stock ranks between a "buy" and a "hold." It receives 15 "buys," 11 "holds" and one "sell." Earnings expectations are for a 17 percent gain this year and 24 percent next year.

Projected five-year annualized growth rate of Lowe's is 18 percent, compared with 13 percent for Home Depot. The industrywide forecast is 15 percent.

I'm 39 years old and have all my investments in an individual retirement account and 401(k) retirement plan. I'm looking to invest outside my retirement savings. What do you think of Northern Technology Fund?

- C.M., via the Internet

How do you feel about roller-coaster rides?

This fund suffered a loss of 41 percent in 2002 and rebounded with a 55 percent gain in 2003, which is volatile by anyone's standards.

However, it has two respected veteran portfolio managers and an annual expense ratio that's reasonable relative to other tech funds. Its performance rarely falls into the bottom half of its category.

The $374 million Northern Technology Fund (NTCHX) has gained 13 percent over the past 12 months and posted a three-year annualized decline of 6 percent. Both results rank in the top one-third of technology funds.

"Even relative to tech funds, this fund is pretty gutsy and willing to pay up for companies with good growth prospects," said Laura Pavlenko Lutton, analyst with Morningstar Inc. in Chicago. "It is very aggressive and therefore should only represent a sliver of one's overall portfolio."

As a play on blue-chip technology stocks, it is a well-run fund for money you don't mind losing, she said. But it is "by no means" a core holding for an individual's portfolio, regardless of one's age or temperament for risk, she added.

John Leo has managed the Chicago-based fund since its 1996 inception, with software and Internet specialist George Gilbert as co-manager since 1997. Both typically invest their own money in the fund.

Northern Technology Fund's top holdings recently were Juniper Networks, Qualcomm, Yahoo, Electronic Arts, Broadcom, eBay, Micron Technology, Hewlett-Packard and Xilinx. This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has an annual expense ratio of 1.25 percent.

Since gold has been hit hard lately, yet inflation seems to be rising, I'm thinking gold might be a good investment. What ways are there to invest in it?

- M.T., via the Internet

Gold has always been considered the asset of last resort, offering value even when governments and societies tumble.

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