Alcoa rates a `hold' as sales soar

Your Money

May 27, 2007|By Andrew Leckey | Andrew Leckey,Tribune Media Services

I'm not sure what to make of Alcoa Inc. Should I keep its shares in my portfolio?

- K.G., via the Internet

The world's largest aluminum producer is expected to turn in record revenues for the next couple of years.

Global demand for aluminum is strong, even though that metal is not in as short supply as some other commodities. The company controls 13 percent of the world's aluminum smelting, used in products that include soda cans, industrial turbines and aerospace components.

Alcoa is, for example, one of the largest suppliers to Boeing Co.

Shares of Alcoa (AA) are up 36 percent this year after a 1 percent increase last year. Demand from jet manufacturers and global construction helped overcome weakness in its automotive business to boost net income 9 percent in the first quarter as sales increased 11 percent.

But the big news is Alcoa's recent $27 billion bid for its Canadian rival Alcan Inc., with shares of Alcan rising dramatically on the news. To encourage Canadian regulators to approve the deal, which would change the configuration of the industry, Alcoa said it would invest as much as $7 billion at several Canadian plants. Last week, Alcan recommended that shareholders reject the deal.

Many analysts and shareholders like the deal as a way to add to the company's influence, though some said Alcoa should put itself up for sale. Earlier this year, two Australian mining companies were rumored to be considering making a bid for Alcoa.

With all that going on, Alcoa shares currently receive a consensus "hold" rating from the Wall Street analysts who track them, according to Thomson Financial. That consists of two "strong buys," five "buys," 10 "holds," one "under perform" and one "sell."

Alcoa faces rising competition from countries such as China and Russia that are aggressively boosting their aluminum production.

Under pressure to improve its efficiency, Alcoa announced last fall it would reduce its work force about 10 percent. While it has made acquisitions, it also has unloaded underperforming businesses to help boost its return on invested capital.

Earnings are expected to increase 10 percent this year versus 7 percent forecast for the aluminum industry. Next year's earnings are expected to decline 4 percent, while the industrywide projection is a fractional gain. The company's five-year annualized growth rate of 10 percent compares with nearly 9 percent for its peers.

I have heard about the Marsico Focus Fund for some time. Is this a good fund?

-R.L., via the Internet

Longer term, this fund concentrated in about 30 stock names has been a great performer. Lately, not so much.

Financial stocks have hurt its performance, though portfolio manager Thomas Marsico remains convinced investors are underestimating potential and overestimating risk. The fund's casino stock holdings, meanwhile, have continued to prosper.

The $4.9 billion Marsico Focus Fund (MFOCX) is up nearly 13 percent over the past 12 months to rank in the lowest 15 percent of large-growth funds. Its three-year annualized return of 12 percent ranks at the top one-fourth of its peers.

"Tom Marsico is a veteran growth investor [who is] really good at picking the themes and changes taking place in the overall economy and following them down to how they affect individual companies," said Karen Dolan, analyst with Morningstar Inc. in Chicago. "We recommend this fund and believe it could be used as a core holding, though it needs to be paired with some other styles of funds."

Marsico is not, for example, a big fan of tech stocks, typically a significant portion of growth funds, Dolan noted, and that could leave a gap in an investor's diversification. In addition, having so few stock names increases risk.

The bulk of the portfolio consists of steady growth stocks held long term, though it does hold some fast growers and inexpensive names.

Marsico started Marsico Capital Management and this fund in 1997 after success at two growth-oriented investment houses. His firm, which runs three other funds, has 16 analysts, five traders and two other portfolio managers.

Financial services represent about one-fourth of the Marsico Focus Fund's assets, with other significant holdings in consumer services, health care and consumer goods.

Largest stocks are UnitedHealth Group Inc., Genentech Inc., Goldman Sachs Group Inc., Toyota Motor Corp., MGM Mirage, Comcast Corp., Burlington Northern Santa Fe Co., Procter & Gamble Co., FedEx Corp. and Las Vegas Sands Corp.

This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has an annual expense ratio of 1.24 percent. Marsico is a large shareholder in this fund. Seventy percent of its board is independent and all independent trustees have money invested in the fund.

What is the difference between money-market funds and money-market accounts?

- A.D., via the Internet

Both share the objectives of providing a short-term parking space or a liquid rainy-day investment with checking privileges:

Money-market accounts are available at banks or credit unions. They are insured up to $100,000 by the Federal Deposit Insurance Corp. for non-retirement accounts.

Money-market funds are primarily offered by mutual fund companies, though banks also may sell some money-market funds as part of their proprietary brand of funds. Either way, they are not FDIC-insured.

"Money-market funds buy conservative short-term instruments such as government and corporate debt, so they are very safe and returns are similar from one fund to the next," said Greg McBride, financial analyst with in North Palm Beach, Fla. "Any disparity in rates would be due to the annual expense ratio."

Rates of insured money-market accounts will vary among banks because an institution can pay whatever it is willing to in order to attract your money, McBride said. Some banks eager to attract deposits pay higher rates than competitors.

Andrew Leckey writes for Tribune Media Services.

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