Question — I have been an International Business Machines shareholder through thick and thin. As a new year begins and technology continues to be a problem, I'm wondering whether to keep or sell these shares. Can you shed any light on their prospects? — K.H., Los Angeles
Answer — Investors in Big Blue have become increasingly blue. This is most recently due to a significant slowdown in information technology spending by companies that's expected to continue in 2001. Outlays for large mainframe computer systems should be hard hit, which is especially bad news for IBM with its recently introduced new generation of mainframes.
This tech giant faces nimble competition: Sun Microsystems continues to beat it in the server business, EMC is the big winner in the storage market, and several companies are besting its efforts in enterprise software. Thank goodness for the strength of IBM's services business.
IBM shares declined about 20 percent in value in 2000. That's in contrast to their gain of 18 percent in 1999 and 78-percent increase in 1998.
Because their price appears attractive, IBM shares currently rate a consensus "buy" recommendation from the Wall Street analysts who track them, according to the Boston-based First Call research firm. The strength of that rating, which has been slipping since October, now consists of nine "strong buys," four "buys" and five "holds."
While IBM remains the world's top provider of computer hardware, some critics believe it may simply be too big to react quickly to competitors. Investors need to see stronger competitive efforts, cost controls and revenue growth rates if they are to get excited about future prospects.
Revenue growth was disappointing during the past year, and the company forecasts it will be single-digit in 2001. IBM is unlikely to equal the prospects of the rest of the computer hardware industry. Its earnings are expected to grow 16 percent for 2000, vs. 30 percent for the overall industry. Its projected 11-percent gain for 2001 compares to 20 percent for its peers. The five-year annualized IBM forecast calls for a 14-percent gain, vs. 18 percent industry-wide.
On the positive side, the company is being aggressive. For example, it recently made a deal with Telia, Scandinavia's largest telecommunications firm and Internet service provider, in which 70 existing Web-hosting servers were replaced by a single IBM mainframe. The setup uses IBM's "Shark" storage technology, with both systems running on the Linux platform.
It has entered into partnerships with newer firms such as Ariba, Siebel Systems and consulting firm i2 so that it doesn't have to spend money developing everything on its own.
Question — Everything I read seems to be about value investing. One fund mentioned is Third Avenue Value Fund. Is it a good bet? — D.L., via the Internet
Answer — Long-time portfolio manager Marty Whitman is a vulture investor. This deep-value fund snaps up stock of companies others left for dead.
He's shown expertise lately in financial and semiconductor stocks. Though he did sell some appreciated semiconductor stocks in 2000, his fund is generally a good choice for investors to avoid a lot of distributions.
"Whitman manages tax-efficiently, keeping portfolio turnover low," pointed out Chris Traulsen, senior analyst with the Morningstar Mutual Funds investment advisory. "He holds some stocks so long, they become growth investments."
The $1.8 billion Third Avenue Value Fund gained 22 percent over the past 12 months to rank just above the midpoint of small-cap value funds. Its three-year annualized return of 13 percent places it within the top 10 percent of its peers.
Nearly half the fund's portfolio is in financial stocks. Top holdings were recently Silicon Valley Group, AVX, Tokio Marine and Fire, MBIA, First American, Tejon Ranch, Toyoda Automatic Loom Works, Liberty Financial Co., Mitsui Marine & Fire and Legg Mason. This "no-load" (no sales charge) fund requires a $1,000 minimum initial investment.
Question — I'm an 87-year-old widow who has owned AT&T shares for more than 50 years and added to them through dividend reinvestment. If I sell, I have no idea how to figure their cost basis for my taxes, especially due to spin-offs and splits. Can you help?— M.J., Oak Brook, Ill.
Answer — You may not need to worry.
"Unless you really need money now, it makes sense tax-wise to keep your shares and leave them to someone in your will," advised Martin Nissenbaum, national director of personal income tax planning for Ernst & Young. "Also, if you gift the stock to charity, you get a deduction for the market value and don't have to know what the original cost basis was."
If you must sell, you'll have to determine your cost of acquiring those shares, including broker fees. This is culled from bank or brokerage statements, AT&T dividend reinvestment statements, confirmation statements or personal records. The AT&T Web site www.att.com/ir has a tax basis information section. You can also phone 800-348-8288. Because the process is complex, you may really require the assistance of your tax adviser or the IRS in order to use this information for tax purposes.
Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," 98 Henry St., Dept. 183, Brooklyn, N.Y. 11201, or by e-mail at successinv@aol.com.