New CEO delivers at Hewlett-Packard

Taking Stock

Your Money


I've been really pleased with the progress of my Hewlett-Packard Co. stock this year. Can the good times continue this time?

- K.J., via the Internet

I've had the opportunity over the past year to chat informally with several different longtime regional executives of HP who have owned its stock for many years.

All expressed newfound optimism about the company. They had been disgruntled about the direction former chief executive Carleton S. "Carly" Fiorina was taking before she was ousted and had chafed over her controversial acquisition of Compaq Computer Corp.

Mark Hurd, who was named CEO in March, was hailed as their rescuer. He is delivering operating profit ahead of expectations.

Wall Street has embraced that upbeat assessment: Shares of Hewlett-Packard Co. (HPQ) have gained 38 percent in 2005, compared with a decline of 9 percent in 2004.

Yet investing in HP stock must extend beyond near-term goodwill for Hurd. It represents a bigger bet that he can continue to boost efficiency, solve long-standing problems and foster growth.

Net income fell 62 percent in HP's latest quarter as it took a $1.1 billion charge for a structuring that is eliminating 15,300 jobs. Apart from that one-time expense, however, earnings were up; its computer, printer, enterprise server and software units all reported revenue growth and exceeded expectations in the face of fierce competition.

Then there's that nagging Compaq merger. Although it did create a giant in product portfolio and global reach that ranks No. 2 in PCs worldwide, it hasn't produced the predicted profit. It is uncertain what steps Hurd will take to try to solve that.

Personal computers have become a commodity, and the company's PC business is hampered by a more expensive distribution system than leading PC-maker Dell Inc. Nonetheless, shares of the seemingly invincible Dell have stumbled badly this year.

HP has seen executive departures, including software unit manager Nora Denzel, who oversaw its first-ever profit in the recent quarter. It remains to be seen whether departures will hurt the company and aid competitors.

Reflecting turnaround uncertainties and the stock price run-up, the consensus recommendation on shares of HP is midway between "buy" and "hold," according to Thomson Financial. That consists of eight "strong buys," five "buys," 14 "holds" and one "sell."

HP earnings are expected to increase 12 percent this fiscal year, versus the 21 percent predicted for the diversified computer systems industry. Next fiscal year's anticipated 15 percent increase compares with 22 percent forecast for its peers. The expected five-year annualized growth rate of 12 percent trails the industrywide projection of 15 percent.

Should I continue to contribute to Oakmark Equity and Income Fund? I'm fairly conservative.

- D.D., via the Internet

Its focus on inexpensive stocks and U.S. Treasuries suits your conservative nature.

Having nearly one-fourth of its stock portfolio in energy companies has boosted the results of this fund. But even within energy, it carefully seeks companies that make realistic assumptions about their reserves.

The $9.9 billion Oakmark Equity and Income I (OAKBX) has gained 11 percent over the past 12 months to rank in the top 9 percent of moderate allocation funds. Its three-year annualized return of 15 percent puts it in the top 11 percent of its peers.

"The managers really do a good job and invest heavily in the fund themselves," said Paul Herbert, analyst with Morningstar Inc. in Chicago. "This fund would make a good core holding for a conservative investor who doesn't want the fluctuations of a portfolio that's fully invested in stocks."

Clyde McGregor and Edward Studzinski, the fund's managers, are value-oriented but go against the usual grain by including inexpensive small- and mid-cap companies in the stock mix. Besides energy, the major concentrations in its 50-stock portfolio are consumer goods, industrial materials and media.

The bond portfolio, representing more than one-third of the fund's total holdings, emphasizes Treasuries and has some high-yield and non-U.S. government paper. Average credit quality is AAA. Top stock holdings were recently the shares of Burlington Resources, XTO Energy, Nestle SA and Caremark Rx.

"With 30 percent of its stock portfolio in mid-caps, this year's best-performing category, this fund might not do as well as others in its category if large-cap stocks did well across the board," Herbert said. "But I think the stock-picking would still be pretty good, and it would hang in there nonetheless."

The fund is open only to existing shareholders, retirement plans and investors who purchase directly from Oakmark. This "no-load" fund requires a $1,000 minimum initial investment and has an annual expense ratio of 0.89 percent.

I own stock in a company that filed for bankruptcy and is no longer listed. How do I know if it is worthless, and how should I treat it on my tax return?

- L.L., via the Internet

In general, a stock must be canceled to be deemed worthless, because the IRS wants proof that it has no real potential for increasing in value. Bankruptcy or de-listing isn't enough.

Either a broker, the company itself - if anybody's still around - or the stock's transfer agent should be able to tell you whether or not this is the case. If you can't prove your shares worthless but want your deduction now, just sell them and take the capital loss.

"You could sell the certificates to someone [such as a neighbor or friend but not a relative] for a small price and take the capital loss without having to worry about whether or not they actually are worthless," said Martin Nissenbaum, national director of personal income tax planning for Ernst & Young in New York.

When filing your taxes, where it says "selling price" on Schedule D, you either write in "worthless," if you've determined that, or your selling price.

Andrew Leckey writes for Tribune Media Services.

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