Q. What is your opinion of shares of United Parcel Service Inc.? -- R.A., via the Internet
A. Expectations of a weak U.S. economy and high fuel prices continuing into next year have prompted the world's largest delivery company to enact a hiring freeze and significantly reduce its spending.
The question for investors is whether the company's stock has adequately discounted those problems. Shares of United Parcel Service (UPS) are down 10 percent this year following last year's 6 percent decline.
UPS handles an average of 15 million shipments a day throughout the world, with the U.S. package segment generating two-thirds of its revenue. The company's net income was down 21 percent in the second quarter, in part due to lower demand for its premium shipping services
It expects to gain $1 billion annually in added sales from a planned 10-year contract to handle the North American air-parcel deliveries of Deutsche Post's DHL unit. Last year, the company had just under $50 billion in revenue.
But that proposal faces a congressional hearing Sept. 16. Federal regulators have been asked to examine it closely, primarily because 8,000 jobs would be lost due to the closing of DHL's Ohio air hub.
The consensus analyst rating on UPS shares is between "buy" and "hold," according to Thomson Financial, consisting of four "strong holds," four "buys" and nine "holds."
In a business where the size of a network is crucial, UPS has a fleet of about 600 planes and 100,000 vehicles.
China is a major focus, as evidenced by the flood of UPS advertising throughout that country during the Olympic Games. Its billboards proclaimed: "If UPS can fully assist the Beijing 2008 Olympics, they can fully assist you."
Most important, the firm is opening a global express-delivery hub in Shanghai in November and plans to open an enormous intra-Asia sorting center in the city of Shenzhen in 2010.
In the U.S., the company's new labor contract with the International Brotherhood of Teamsters, which represents about 238,000 UPS workers, took effect in August and is expected to help its bottom line.
Earnings are expected to decline 13 percent this year compared with 8 percent growth predicted for the air delivery and freight services industry. Next year's forecast is for a 13 percent gain versus 15 percent expected for its peers. The expectation of a five-year annualized return of 11 percent compares with 15 percent projected industrywide.
Q. My holdings in Gabelli Value Fund "A" seem to be going nowhere. Should I hold on? -- V.L., via the Internet
A. This portfolio run by a famous manager is highly concentrated, which means that the up times and down times are magnified. Lately, however, it has been mostly down times.
The $632 million Gabelli Value Fund "A" (GABVX) is down 14 percent over the past 12 months. It has a three-year annualized return of 2 percent and a five-year annualized return of 7 percent. Those results rank in the lowest one-third of mid-cap growth and value funds.
"We don't recommend this fund because it is too concentrated in media, telecom and industrial stocks and therefore tends to flow with their performance," said Greg Brown, analyst with Morningstar Inc. in Chicago. "For example, right now media and telecom are out of favor, so it is underperforming its peers."
Experienced investor Mario Gabelli, known for his long career of astute stock picking, has run this fund since its 1989 inception. He is a value investor in the mold of Warren Buffett, seeking firms that he estimates are trading at a discount to the present value of their future cash flow. But his industry focus is considerably more limited than Buffett's. Christopher Marangi is the associate portfolio manager.
Indication of Gabelli Value Fund's focus on volatile media stocks is the fact that it has 6 percent of assets in top holding Viacom Inc., just over 5 percent in Cablevision Systems Corp. and 3.5 percent in CBS Corp.
"Gabelli is a very long-term investor, with portfolio turnover in this fund in the single digits," said Brown, who prefers the sibling Gabelli Asset Fund (GABAX) because the portfolio is broader-based. "Low turnover, along with good stock picking, probably accounts for a good amount of the strong longer-term record of Gabelli Value Fund."
Nearly one-third of the fund is invested in media and one-fourth is invested in industrial materials. Top stock holdings are Viacom, Cablevision Systems, CBS, American Express Co., Swedish Match AB, Newmont Mining Corp., Barrick Gold Corp., Honeywell International Inc., Time Warner Inc. and Liberty Entertainment Group.
Gabelli Value Fund "A" requires a 5.75 percent "load" (sales charge) and $1,000 minimum initial investment. Its annual expense ratio is 1.39 percent.
Q. When investing in municipal bonds, how and why do you calculate the tax-equivalent yield? -- H.E., via the Internet
A. A municipal bond is a debt security issued by a state, municipality or county to finance its capital expenditures. It is exempt from federal taxes and from most state and local taxes.
The tax-equivalent yield is the pretax yield that a taxable bond needs for its yield to equal to that of a tax-free municipal bond.
"Munis usually make sense for investors in the 25 percent or higher tax brackets," said Mark Balasa, certified financial planner and co-president of Balasa, Dinverno & Foltz LLC financial advisers in Itasca, Ill. "Below that, the advantage is marginal, and it almost never makes sense in the 15 percent bracket."
To compute the tax-equivalent yield, you take your tax bracket and subtract it from 1, Balasa said. For example, subtracting a 28 percent tax bracket from 1 results in 0.72.
In that example, a muni yielding 4 percent divided by 0.72 results in 5.56 percent. That means a muni yielding 4 percent is the equivalent of a taxable bond that yields 5.56 percent.