A: The nation's second-largest discount retailer is a fine company, renowned for offering merchandise with style and low price. Nonetheless, it can never relax in its competition with industry leader Wal-Mart Stores Inc.
- Andrew Leckey
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IN THIS PACKAGE
- Looking at pitfalls in retirement plan
- Bad experiences can prime elderly for cons
- The savings game
- The Leckey file
- Getting started
- Spending smart
- Can they do that?
- Taking stock
- The week ahead
- Earnings Forecasts
- Stock Broking
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Recent concerns about Target that have hurt its stock price don't involve comparative store count, however, but its rapidly growing credit card operation. Its success there could turn out to be too much of a good thing.
A large portion of Target earnings lately have come from that credit card business, rather than retail sales, which could become worrisome if the economy tanks and delinquent accounts increase significantly. Management rejects that idea and maintains that its credit card business is sound.
While June sales were better than expected as Target outpaced Wal-Mart and other competitors, its July same-store sales were at the low end of its reduced forecast. It has deeply discounted its furniture and Global Bazaar home accessories, and there are doubts about grocery profit margins.
Shares of Target (TGT) are down 14 percent this year following last year's 6 percent gain. The company recently increased its regular quarterly dividend. It has a significant amount of debt but generates enough cash to service it.
None of the concerns change the fact that Target is a well-run company that tackles all of its problems in an efficient manner. Its brand name has a positive connotation with shoppers and it has held its own with Wal-Mart, which has recently been trying to revive its own sales momentum by aggressively remodeling stores.
The consensus analyst rating on Target shares is a "buy," according to Thomson Financial, which consists of five "strong buys," 11 "buys," seven "holds" and one "sell."
Earnings are expected to increase 15 percent for its fiscal year ending in January, compared with 12 percent forecast for the discount variety store industry. Next year's predicted 14 percent gain compares with 16 percent forecast industrywide. The expected five-year annualized return is 15 percent versus 14 percent for its peers.
Q: My 88-year-old mother told me to read your column because she said you're "a very smart boy." So could you please tell me if you think Calamos Growth and Income Fund is a good investment? -- R.P., via the Internet
A: Smart woman, your mother. I feel younger already.
This fund was hit hard in the market's latest downturn, but in the long run has been an outstanding investment and a good way to diversify an individual's portfolio. It invests primarily in convertible securities, which are either preferred stock or bonds.
The $6.3 billion Calamos Growth and Income Fund (CVTRX) is up 6 percent over the past 12 months and has a three-year annualized return of 11 percent. Both results rank in the upper one-third of convertible securities funds.
"John Calamos and his nephew Nick Calamos have been in charge a long time, building a boutique investment shop into a solid organization that delivers the goods across a number of their funds," said Kerry O'Boyle, analyst with Morningstar Inc. in Chicago. "An investor nearing retirement who wants to ease back on equity exposure but not go whole-hog into bonds just yet could see this fund as a nice hybrid."
Convertible securities make regular dividend or coupon payments, though yields are lower than those of regular bonds, and give the opportunity to convert at some point to common stock at a preset ratio. They're recognized for featuring some of the upside of stocks with less volatility and more downside protection.
The convertibles this fund owns often are low- and mid-quality issues of small- and mid-cap companies. It owns quite a bit of common stock as well.
"Despite their positives, convertibles are a small niche area of the overall market and we wouldn't recommend putting more than 10 percent of your overall portfolio into them," O'Boyle said. "They can be a quirky market."
The fund's top holdings include U.S. Treasury notes and common stock of Burlington Northern Santa Fe Corp., Goldman Sachs Group Inc., Infosys Technologies Ltd., United Health Group Inc. and Nvidia Corp. It also owns bonds of Merrill Lynch & Co., Valero Energy Corp., Liberty Media Corp. and Halliburton Co.
Calamos Growth and Income Fund requires a 4.75 percent "load" (sales charge) and has an annual expense ratio of 1.06 percent.
Q: How does buying on margin work? When does it work best? -- M.C., via the Internet
A: As with many investments, it works best in a positive stock market environment. Down markets, as the 1929 stock market crash painfully dramatized, are the worst times to have margin accounts.
When you sign papers to open a margin account with your broker, it enables you to borrow up to 50 percent of the purchase price of a stock. Consider it a loan from the broker. When you sell the stock in a margin account, proceeds go to your broker against repayment of the loan until it is paid in full. Interest charges on the loan are applied to your account unless you decide to make payments.
"If the stock falls far enough in price, the brokerage will issue a margin call requiring you to come up with the money to maintain a certain level in your account," said David Bendix, certified financial planner and certified public accountant with the Bendix Financial Group in Garden City, N.Y. "That makes it a risky undertaking, for if you can't come up with the money, the broker will liquidate your equity to come up with it."
Andrew Leckey is a Tribune Media Services columnist. E-mail him at email@example.com.