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Archive for Sunday, May 23, 2004

The Motley Fool

May 23, 2004

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Last week's question and answer

Norman Rockwell once painted for me. My flagship product was consumed in space in 1985. My most famous television commercial featured a crowd of young people singing on an Italian hilltop. A South African comedy, "The Gods Must Be Crazy," revolved around one of my product's packaging. Born in 1886 and based in Atlanta, I rake in more than $20 billion per year. I sport the world's largest distribution system, offering more than a billion servings of what may be the world's most recognized product each day. My spokesanimal is the polar bear. Who am I? (Answer: Coca-Cola)

Know the answer to this week's question? Send it to us with Foolish Trivia on the top and you'll be entered into a drawing for a prize. The address is Motley Fool, Box 19529, Alexandria, Va. 22320-0529.

Caterpillar roars

Heavy equipment maker Caterpillar (NYSE: CAT) recently reported earth-moving first-quarter results, featuring a 34 percent increase in revenues to $6.47 billion and earnings surging 214 percent.

For 2004, Caterpillar is projecting a 20 percent rise in revenue and a 65 percent to 70 percent jump in earnings, a forecast that safely can be called a blowout. Chairman and CEO Jim Owens commented that the world economy is on track to put forth "one of the strongest, broadest recoveries in years," and that, as a result, "sales opportunities are increasing."

Somewhat surprisingly, first-quarter gains were greatest in Latin America, as machinery sales in the region jumped 61 percent and engine revenue rose 59 percent. The region is struggling and is the slowest growing among emerging markets, making Caterpillar's performance there all the more impressive.

Caterpillar is banking on continued strong demand for housing, a recovery in commercial construction and increased highway funding. The first two assumptions rely on the Fed to keep interest rates steady, which in the short term appears likely. As for highway funds, all current federal spending proposals exceed 2003's outlay, with increases from $38 billion to $100 billion.

Admittedly, Caterpillar shares already are near their 52-week high. But if you believe the company's outlook for itself and the global economy, Caterpillar should be on your radar screen.

Mutual funds

What's a mutual fund, and how can it benefit me? How does it work, and how safe is it? -- Connie Rodgers, Pleasanton, Calif.

A mutual fund is the money of many investors, pooled together and managed by a company of professionals. Mutual funds are a terrific idea, because they permit ordinary people who aren't investment whizzes to increase their wealth by investing in securities carefully chosen by fund managers. At least, that's how it's supposed to work.

There are many kinds of mutual funds, tailored to many kinds of investors. Some funds invest just in stocks, others in bonds, and some in both. Some focus on large companies, others on small companies, and others on both. Some seek income through dividend- or interest-paying securities, and others aggressively seek fast-growing firms. Some specialize in one industry (such as health care or real estate) and others in one region (such as Asia or Europe).

Unfortunately, many professionally managed mutual funds don't do so well for their investors because of hefty fees and/or manager problems, such as a lack of talent or a counterproductive focus on short-term results. To combat this, many investors sensibly opt for index funds, which tend to sport very low fees and invest only in the stocks of major indexes, such as the S&P 500.

Learn more about mutual funds at www.fool.com/mutualfunds/mutualfunds.htm and research them at www.morningstar.com

A stupid success

My absolute dumbest investment has to be Lucent Technologies. When I bought it back in July 2003, it had announced a terrible quarter. The company had negative equity, no recent profits or signs of upcoming operating profits, outsized pension liabilities, and declining revenues. But the stock has now more than doubled for me. The company's business still does not look good, and it has been missing out on several major contracts that, in years past, would have been virtually guaranteed. The company, frankly, still looks terrible, just not as fatal as it did last year. So why is it my dumbest investment? Because it was purely speculation.

Every single piece of objective data said, "Stay away from this turkey." There was no good reason for me to buy Lucent. But buy I did, and now I'm sitting here with an outrageous paper gain. I still have no reasonable rationale for purchasing or holding the security -- and that is dumb -- Chuck Saletta, Cincinnati

The Fool Responds: You're right, and lucky. If you still don't believe in Lucent, you should sell.

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