J.C. Penney's shrewd tactics rate it a `buy'

Your Money

January 28, 2007|By Andrew Leckey | Andrew Leckey,Tribune Media Services

I am a longtime share- holder in J.C. Penney Co. I am pleased with its performance but wonder whether its many competitors are growing too large for it to handle.

- R.C., via the Internet

The late James Cash Penney, who founded the retailing company in 1902, would be proud of its modern inventory-management technology.

The company boasts some of the most advanced software in the industry and knows how to use it effectively.

Its merchandise selection is also progressive, indicated by recent additions of high-end Sephora cosmetics counters, East 5th women's working apparel and a broader selection of clothing by designer Liz Claiborne.

Definitely not one of the many famous retailing names that have faded into obscurity, it has more than 1,000 U.S. department stores, plus four catalog-Internet centers. It is on schedule to annually open 50 new non-mall stores through 2009.

Shares of J.C. Penney (JCP) are up 5 percent this year after gains of 39 percent last year, 34 percent in 2005 and 57 percent in 2004. Third-quarter profits rose 23 percent, helped by strong sales of St. John's Bay women's clothing and Chris Madden home goods.

The consensus rating on Penneys stock is a "buy," according to Thomson Financial. That consists of four "strong buys," five "buys," six "holds" and one "under perform."

Penneys does face fierce competition. Among national rivals, Macy's is pushing it from the department store side and Target Corp. is shoving it from the discount side.

Although management has proved to be shrewd and the next several years are promising, the chain doesn't appear to enjoy any especially unique long-term retailing advantages. It also needs to lure back customers it lost during some of its down years, when merchandise selection and pricing were unimpressive.

Earnings are expected to increase 33 percent in the fiscal year ending in January and 12 percent next fiscal year. The predicted five-year annualized growth rate is 16 percent.

Myron Ullman, who became chairman and chief executive two years ago after holding top positions with LVMH Moet Hennessy Louis Vuitton and Macy's, is focused on improving same-store sales and profit margins.

There has been recent executive turmoil: Catherine West, former president of the U.S. credit card business of Capital One, was fired in late December as the retailer's chief operating officer after just five months on the job. No reason was given, but West apparently didn't fit the retailing mold.

What is your opinion of American Funds New Economy? My husband and I have this fund in our Roth individual retirement accounts. We plan to retire in about 15 years.

- E.W., via the Internet

As a long-term holding, it features low expenses, experienced management, extensive research capacity and a dedicated buy-and-hold philosophy.

Recent solid results due to smart stock-picking are nothing to sniff at either.

The $8.8 billion American Funds New Economy (ANEFX) gained 13 percent over the past 12 months and has a three-year annualized return of 12 percent. Both results rank in the top 6 percent of large growth funds.

But don't be fooled by its trendy name. This is not a narrowly based Internet or technology fund from the 1990s, but rather a fund launched in 1983 to focus on the broad concept of service and information. Its diverse holdings can include banks, media companies or business services.

"It's difficult to pound the table in favor of American Funds New Economy because it is hard to categorize, and you shouldn't rely on it to hold up well in a down market," said Paul Herbert, analyst with Morningstar Inc. in Chicago. "It also has about 40 percent of its portfolio in non-U.S. stocks, which might be another consideration for investors."

It works best as a way to make a personal portfolio more diverse if the investor already owns a lot of "old economy" stocks, Herbert said. But he's not sure that encompasses a lot of potential investors these days, especially with so many people owning index funds that include many sectors.

The fund's portfolio is divided into five parts run separately by four managers and the research team. One of the managers, Gordon Crawford, has been in the business for more than three decades.

Financial services represent one-fifth of the fund's assets. Other significant concentrations are technology hardware, consumer services and health care. Largest holdings recently were Google, Target, Cisco Systems, Schlumberger, Freddie Mac, UniCredito Italiano, Intel, Microsoft, Bayer and Societe Generale.

This 5.75 percent "load" (sales charge) fund requires a $250 minimum initial investment and has an annual expense ratio of 0.79 percent.

I left my job and rolled over my 401(k) retirement plan into an individual retirement account. There is no 401(k) at my new job. Can I make new contributions to my rollover IRA? Can I still make contributions to my Roth IRA?

- M.S., via the Internet

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