BusinessWeek Online - Well Spent

Stock ownership is up

Given the general dissatisfaction of the investing public, you'd think that stock ownership would have fallen markedly in the U.S. since the tech bubble burst in 2001 and was followed by waves of corporate scandal.

Not so, according to two finance industry trade groups, the Securities Industry Association and the Investment Company Institute. According to their joint survey, "Equity Ownership in America, 2005," half of all U.S. households own stocks, either directly or in a mutual fund or retirement plan.

]]> According to the release:

“Despite experiencing a market contraction that was one of the worst bear markets since the Great Depression, the number of individuals in the U.S. owning equities is up 5.2 percent since 2002, and up 14.4 percent since 1999," says Frank Fernandez, Senior Vice President of the Securities Industry Association.

That's 56.9 million households, up from 54.1 million in 2002 and 40 million in 1995.

The growth isn't happening because we're turning into a nation of stock jockeys, however. Study authors conclude that the increase in equity-owning households is due mainly to the spread of 401(k) plans.

Ave Maria Fund ideas

I spoke recently with George Schwartz, portfolio manager of the Ave Maria Fund, a stock fund that invests according to Catholic values (which basically means it avoids companies which have anything to do with abortion or pornography, or that provides benefits to unmarried couples).

We didn't talk about the fund's philosophy though. Instead I asked him what stocks he likes. Here are two ideas he gave me (in his words, with a few edits):

]]> Diebold (DBD) makes ATM machines for banks and self-checkout machines for grocery stores. The company has been around for 140 years and has increased its dividend every year for last 51 years. It has low debt and is a financial powerhouse. But its earnings disappointed earlier this year and the shares fell from $57 to $36.

At that price it is a real bargain. It will earn $2 a share in earnings this year and $2.50 next year. Its dividend is 2.2% and I'm very confident that will be increased next year.

Fargo Electronics (FRGO) is a very small-cap name. It is a homeland security play since it makes printers and supplies for making high-tech identification cards, like driver's licenses and security access cards. It has no debt, high margins and is growing at a 14% to 15% annual rate. The stock is at $19. It is inexpensive for such a high quality company.

Good news for independent analysts?

Wondering why brokerage-house analysts usually have so much more stock-moving muscle than independent analysts? One big reason is that brokerage firm trading services are often bundled with research. Large institutional investors want to be tops on the list of best clients at places like Goldman and Lehman to ensure that they get the best service on trades. That means they get a lot of brokerage house research thrown in with the deal.

If institutional investors want independent research, they usually pay for it by trading with a firm that has a relationship with the independent analyst they are following. That trading firm then pays the independent analyst a rebate (known as "soft dollars") as compensation. Confusing right?

Now the Securities and Exchange Commission is looking at this web of relationships more closely to make sure that the investors who are the clients of money managers (i.e. mutual fund shareholders) are getting the best trading and execution services.

Last week the SEC issued long-awaited guidance on soft dollar relationships (it now calls them "client commission practices") which found it is okay for money managers to pay for research with trading commissions. There's still more guidance coming on how these payments should be disclosed.

Here's what John Meserve, president of BNY Research, Commission and Payment Services (a division of Bank of New York which aggregates and distributes independent research), told me about the latest news on Oct. 20:

]]> "There had been some ambiguity about whether or not it was appropriate to use commissions to acquire research both from Wall Street and from independent third parties. Today the SEC clarified that it was in fact something that was lawful."

"We expect to see some of the [fund] managers that swore off using soft dollars to pay for research come back into the marketplace."

"This was pretty consistent with what we expected," he says. "It is similar to new rules created in London."

"The next shoe to drop is the whole issue of disclosure and transparency. That will shake out in the next 12-18 months."

"Now there is more of a jump ball for independent research firms to garner some of the traditional research spend won by proprietary firms."

Healthcare smart card?

The intersection of healthcare and technology has been a hot area for entrepreneurs and investors for years. Now we're getting some much needed improvements where finance, health insurance and technology meet.

I spoke recently with Bruce Weitzberg, the chief operating officer of MedCom USA (EMED), a Scottsdale, Arizona, firm that has a card-based system that allows doctors to check insurance eligibility and process transactions electronically. "It looks like a credit card machine on steroids," says Weitzberg.

So far, systems like MedCom's mainly help out the doctor. But down the road they will likely speed up and simplify the confusing health insurance claims process for consumers as well. What a relief that would be!

Year-end tax pitfalls

I just listened in on a year-end tax planning conference call featuring three financial planners that are part of Zero Alpha Group. They identified these four common pitfalls of investors this time of year:

- Blowing your bonus
- Giving gifts (to charities or heirs) without an eye to cutting your taxes
- Cluelessness on the alternative minimum tax (AMT)
- “Playing Santa Claus” at the expense of your retirement plan

For more details on the mistakes, you can read the full press release and even listen to a replay of the conference by following this link: "Avoid the four biggest pitfalls of year-end tax/financial planning."

Earnings growth, without the debt

San Diego Investment adviser Brent Wilsey has come up with a list of companies that have low debt, but above-average earnings growth. He clarifies that this is "real" growth, meaning that it doesn't come from asset sales, accounting changes or other means.

Here's the five stocks he recommended on this basis in an email sent to me on 10/3:

1) HNI Corporation (NYSE:HNI)
Furniture & Fixtures Industry
"Earnings per share for the trailing twelve months versus that for one-year ago is a full 20%, which exceeds the industry average of 18%. Total debt to equity of 0.02 is far below the industry average of 1.20. Current Equity $708MM, Current debt $11MM, TTM earnings $126MM"

2) Bentley Pharmaceuticals, Inc. (NYSE:BNT)
Biotechnology & Drugs Industry
"Earnings per share for the trailing twelve months versus that for one-year ago is a whopping 50%, which exceeds the industry average of 31%. Minuscule total debt to equity of 0.03 is far below the industry average of 0.39. Current Equity $87MM, Current debt $3MM, TTM earnings $8.3MM"

]]> 3) Caremark RX, Inc. (NYSE:CMX)
Retail Drugs Industry
"Earnings per share for the trailing twelve months versus that for one-year ago is an impressive 44%, which exceeds the industry average of 21%. Total debt to equity of 0.06 is well below the industry average of 0.29. Current Equity $7.7 Billion, Current debt $.05 Billion, TTM earnings $787MM"

4) Global Payments, Inc. (NYSE:GPN)
Business Services Industry
"Earnings per share for the trailing twelve months versus that for one-year ago is a full 45%, which more than doubles the industry average of 22%. Total debt to equity is a mere 0.11 versus the industry average of 0.86. Current Equity $578MM, Current debt $64MM, TTM earnings $93MM"

5)Chicago Bridge & Iron (NYSE:CBI)
Construction Services Industry
"Earnings per share for the trailing twelve months versus that for one-year ago is a full 45%, which exceeds the industry average of 37%. Total debt to equity of 0.16 is well below the industry average of 0.96. Current Equity $503MM, Current debt $83MM, TTM earnings $83MM"

Nursing Home Costs Up 5% in 2005

It is depressing, but hardly surprising to see that nursing home costs continue to rise -- up more than 5% this year.

Here's some more data to ponder as you try to save something for retirement. According to a recent survey from the MetLife Mature Market Institute:

- A day in a nursing home costs $203 on average in the U.S. (up 5.7% from last year's cost of $192).
- The average stay in a nursing home is 2.4 years, for a total average cost to $177,828.
- The highest nursing home rates were reported in Alaska at $531 per day.
- The lowest were in Shreveport, Louisiana at $115 a day.
- Home health care costs $19 per hour on average.
- Companion care costs $17 per hour on average.

Break Up Citigroup?

Tom Brown, a leading bank analyst and hedge fund manager, just called for such a move on his web site, bankstocks.com. (See, "The Citi is Sleeping: Break it Up!")

Sorry Sandy (Weill, that is). Weill was the mastermind behind the series of mergers that turned Citigroup into the world's largest financial services company. Now, if Brown has his way, as soon as Sandy is out the door, his legacy of empire building will be reversed.

Maintaining "measured"

Wondering why stocks are sliding in reaction to the Federal Reserve's decision to raise rates another quarter point? It's because the Fed says it will maintain its policy of "measured" rate hikes into the future. (Here's a link to the Fed's statement).

That little (well, not so little), word dashed traders hopes that the Fed would soon stop its rate-hiking ways because of the damaged to the economy wreaked by Hurricane Katrina.

Sorry folks, the Fed sees that Katrina cuts both ways when it comes to inflation -- it raised the price of oil, which may translate into higher consumer prices for a range of goods at the same time that it slowed economic output by demolishing a major American city and port.

]]> Michael Panzner, head trader at Rabo Securities, notes that some investors took solace immediately after the Fed's decision was announced in the fact that it was not unanimous (maybe that signals a slight move in the direction of taking a break from future rate hikes?).

Panzner doesn't think so. "Sounds like some of these guys need a hearing check," he wrote to clients today. "My guess is, the sound of the share prices cracking hard as the day wears on may just do the trick."

Community Investing in Katrina's Wake

This press release popped up in my mailbox today and it looks like a great option for people who want to give money to Katrina, but don't want their contribution to be lost in the billions the government, relief agencies, and generous individuals are already pouring into the region.

Consider making an investment in a community investment fund, such as the CRA Qualified Investment Fund (www.crafund.com). It's a socially responsible bond fund that buys fixed-income securities in cities and states to finance affordable housing, small business loans, job creation, health care, schools and economic development. The fund is trying to raise $100 million (it already has $50 million) to go to redevelop Katrina-hit areas.

]]> According to Morningstar, which only rates the fund three stars (out of five), the fund is up 3% this year and gained 4% last year. That's not very exciting, but its 6% five-year annualized return looks a lot better than a typical S&P 500 Index fund, which has lost 2% a year for the past five years.

Teaching Kids About Money

ING Direct operates a fun site designed to teach kids about money called Planet Orange .

A lot of the content isn't exactly rocket science -- for example, it will take Ashley three months to save enough for a $100 skateboard if she saves $10 a week and only a little over a month if she saves $20 a week. But the anecdotes and illustrations are clever and it makes a handy way to introduce your child to the concept of budgeting.

My guess is the site would have the most appeal to kids in the 10-to-15 age range. But, come to think of it, saving $10 a week for a luxury purchase is an strategy I could use myself!

ETFs for Dividend Seekers

Starting Sept. 15, investors will be able to invest in three new baskets of dividend-paying companies. The three new PowerShares “Dividend Achievers” Portfolios, which will trade on the AMEX, are exchange traded funds (ETF) based on the Mergent Dividend Achievers indexes. A "dividend achiever" is a company that has increased annual dividends for at least 10 consecutive years.

The PowerShares Dividend Achievers Portfolio (PFM) is based on an index that currently has 313 companies that have hiked their dividends on average for 22 years and by 12% annually for the last 10 years. The top five holdings of this ETF are Exxon Mobil (XOM), General Electric (GE), Citigroup (C), Wal-Mart (WMT), and Pfizer (PFE), according to PowerShares.

The PowerShares High Growth Dividend Achievers Portfolio (PHJ) is based on an index of 100 dividend achievers with the highest 10-year annual dividend growth rate. This group has raised dividends by an average of 20.2% annually for the last decade and have beaten the S&P 500 index for the last three, five, and 10-years (through June 30). The top five holdings are Citigroup (C), Wal-Mart (WMT), Pfizer (PFE), Johnson & Johnson (JNJ), and American International Group (AIG).

The PowerShares International Dividend Achievers Portfolio (PID) differs from the other two in that it evaluates dividend growth of international companies (that trade in ADRs in the U.S.) over a 5-year period. The ETF's top five holdings are Eni (E), ABN Amro Holding (ABN), Aracruz Celulose (ARA), Barclays (BCS), and HSBC Holdings (HSBC).

In addition to those three new ETFs, PowerShares has been offering the PowerShares High Yield Equity Dividend Achievers Portfolio (PEY), which has the 50 "dividend achievers" with the highest dividend yield.

Golfers and finance

Duffers take note: Nationwide Financial and Golf Digest have conducted a study of golfers' financial savvy that has some amusing findings. Their survey found:

- While 94% of golfers know what areas of their golf game need improvement, only 45% know what aspect of their saving and investing strategies need attention.
- 85% of golfers know the score of their last round, but only 52% know the current value of their portfolio.
- 74% of golfers have increased the amount of money they spend on golf over the years, but only 54% have increased the amount set aside for retirement.

]]> While those figures make it sound like golfers have a pretty shabby record on financial matters, they actually are doing much better than regular folks. (Click here for the press release and study results.)

Golfers on average have saved nearly $289,000 -- 75% more than non-golfers, the study found. But those golfers are still short of their financial goals since they expect to need $1.3 million to retire comfortably and had an average age of 50. That means the average golfer surveyed needs to triple his or her savings before retirement, according to the study

Fore!

Katrina Scams

I'm back from a week's vacation, where I spent much of the time glued to CNN watching Katrina's devestation of the Gulf Coast.

Today several stories caught my eye reporting on new Katrina-related scams. Here's one from MSNBC about stock-touting schemes.

The Morning Sun, of Mount Pleasant and Alma, Michigan, had this helpful story about how to avoid the "relief" scames.

Brokers go independent

Now that so many traditional stock brokers charge an annual fee based on assets under management for their services (rather than a commission on stock or mutual fund trades), a lot of them are deciding to go it alone. All they need to do is quit their day job, register as an investment advisor, sign up with a firm like Schwab, Fidelity, or TD Waterhouse that will act as their custodian, trader and back office, and get their clients to transfer their accounts. Presto, they are in business. (Okay, it's not that easy, but it's not that hard either).

"A lot of brokers have started to look and act more like registered investment advisers within a wirehouse umbrella," Bob Oros, senior divisional sales manager for Schwab Institutional, told me in a recent interview. "The next logical step is, 'do I really need to share revenues with this firm or can I go it on my own?'"

Schwab commissioned a report on the topic of brokers turning independent, which it released in July. It found that by 2004, independents had 47.5% market share of high-net-worth households, up from 30% 2001. At the same time, traditional stock brokers lost market share, claiming 30% of high-net-worth customers in 2004 vs. 40% in 2001.

]]> The report found that not only do brokers want to run their own show and keep more of the income they generate (rather than having the brokerage firm they work for get a big slice), but they also see a strategic advantage to not being associated with a big brokerage house. Many of the high-net-worth customers these brokers hope to serve like the idea of having an independent advisor -- believing them to be more objective and face fewer conflicts of interest than a traditional broker, according to the Schwab report.

As Oros put it: "There is heightened sensitivity to clients wanting to make sure someone is putting their interests first."