Q. I've owned PepsiCo Inc. stock for more than three years. Withthe buyout of Quaker Oats Co., what are the chances of a stock priceimprovement in the future? - A.P., via the Internet
A. PepsiCo (PEP) is gaining attention for a lot more than justBritney Spears' sultry gyrations in its television commercials.
Its $13.8 billion acquisition of Quaker Oats, approved byshareholders of both companies and under review by the Federal TradeCommission, would allow Pepsi to add Quaker's highly profitableGatorade sports drink to its beverage lineup.
Gatorade holds a commanding 78 percent of the market for sportsdrinks in the U.S., while Coca-Cola Co.'s Powerade line has just a15 percent market share. Because of this move, PepsiCo is selling toMonarch Co. its All Sport sports drink business, which holds about 4percent of the market.
Non-carbonated drinks are especially important to beveragecompanies right now because of the slow growth in carbonated softdrinks. Sales of PepsiCo's Aquafina bottled water have beenespecially strong. Meanwhile, the company's Frito-Lay snack fooddivision keeps gaining market share. Overseas sales of PepsiCo'ssnacks and beverages are rising faster than those of its beleagueredrival Coke.
Many Wall Street analysts think the price of PepsiCo shares isright, especially if the Quaker Oats deal, scheduled to be completedin June, actually comes to pass. Shares are down 8 percent thisyear, following last year's 43 percent increase.
The consensus rating on PepsiCo stock is a "buy," according tothe I/B/E/S International research firm. This consists of 11 "strongbuys," eight "buys" and three "holds."
"PepsiCo is an economically defensive stock that attracts moreinvestment when the economy slows," said Joseph Kalinowski, equitystrategist with I/B/E/S International. "No matter where the economygoes, people are going to do things like drink, eat and take theirmedicine."
Earnings are expected to increase 13.5 percent this year,compared to an 11 percent rise for the beverage industry. Nextyear's predicted 13 percent gain for PepsiCo compares to 14 percentfor its peers. The forecast of a five-year annualized growth rate of13 percent is in line with its industry.
PepsiCo recently named Steven Reinemund chairman and chiefexecutive, succeeding Roger Enrico, who becomes vice chairmanthrough 2002. Reinemund has been president and chief operatingofficer since 1999. Enrico, chairman and CEO since 1996, led PepsiCothrough a major restructuring that included spinning off itsrestaurant business and acquiring the Tropicana juice brand.
Q. I've had a good portion of my individual retirement account inthe Oakmark Fund since 1993. Recently, I've suffered through somebad years with the fund and almost sold, but it now seems to bepicking up again. What's your opinion?- C.H., via the Internet
A. Your suffering may be over. This fund is in a turnaround mode,thanks to a better environment for value-oriented stock funds. Itseeks out bargain basement stocks and there have been lots aroundlately.
The $2.4 billion Oakmark Fund (OAKMX) has gained 34 percent overthe past 12 months to rank in the top 11 percent of all mid-capvalue funds. It was boosted by stocks such as Toys "R" Us and AT&TCorp. That's in sharp contrast to its three-year annualized returnof 2.45 percent that puts it in the lowest quartile of its peers.
Bill Nygren, co-manager of the fund the past year, has anunparalleled track record in successfully running the Oakmark SelectFund, which was recently closed to new investors. He has been withparent company Harris Associates for two decades. This capable stock-picker is likely to buy increasing numbers of larger company stocks.The fund's co-manager is Kevin Grant.
There's a bright spot for investors holding this fund in taxableaccounts based on the fact its previous performance was poor. It hasso many unrealized losses on its books that can be used to offsetfuture gains that it may not have to pay a capital gainsdistribution for several years.
Keep in mind how value investing fits into an individual'soverall portfolio. It's a good idea to have a growth-oriented fundto pair with this value choice, since they'll balance each other.
"Oakmark Fund is a 'pure take' on value investing, so there's agood chance it's not going to keep up with the broad market ifgrowth stocks rule again," explained Scott Cooley, senior analystwith the Morningstar Mutual Funds investment advisory. "It's also alittle more concentrated than the average fund, with just 50 stocks,so there's potential for short-term volatility because a handful ofholdings can have real impact."
About one-fourth of the fund's portfolio is currently inservices. Other large sectors are industrials, durables, staples andretailing. Top holdings were recently Washington Mutual, FortuneBrands, Toys "R" Us, Kroger, H&R Block, AT&T, First Data, Cendantand Brunswick.
This "no-load" (no sales charge) fund requires a $1,000 minimuminitial investment.
Q. Is it possible to make a withdrawal from an individualretirement account and give the proceeds directly to my church? I'mlooking for a way to avoid paying taxes on the withdrawal. - R.M.,via the Internet
A. Sorry, but you have to withdraw the money, pay the tax, givethe money to the charity and then take the deduction. The charitablededuction may not offset the tax on the withdrawal.
"The deduction is an itemized deduction and the income isordinary income, so you may not get dollar-for-dollar against it,"said Ed Slott, certified public accountant and publisher of EdSlott's IRA Adviser newsletter (www.irahelp.com).
Point of interest: A portion of the tax plan presented byPresident George W. Bush would allow individuals over age 59 to maketax-free withdrawals from their IRAs to donate money to charity.That proposal is intended to encourage wealthy retirees, who don'texpect to need their IRA funds to live on, to give the money tocharity.
Andrew Leckey answers questions only through the column. Addressinquiries to Andrew Leckey, "Successful Investing," 98 Henry St.,P.M.D. 183, Brooklyn, N.Y. 11201, or by e-mail atsuccessinv@aol.com.
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