Economic Climate Weighs on Oracle, But It Makes Gains

Posted: Oct 09, 2008 12:01 AM
Economic Climate Weighs on Oracle, But It Makes Gains

Q. Should I brace for the worst with my shares of Oracle Corp.? -- D.L., via the Internet

A. Like all technology firms, it is facing weakened economies in the United States and abroad that have a negative impact on the companies that typically buy its products.

Oracle shares (ORCL) are down 12 percent this year following last year's 32 percent increase and a 40 percent gain in 2006. The company has expressed caution about its near-term prospects.

Nonetheless, its dominant position in database software gives it a degree of pricing power most other technology companies can only dream about. At midyear it enacted 15 percent to 20 percent across-the-board price increases for its U.S. customers.

It also possesses the solid finances and cash flow to grow by acquiring companies, having spent more than $30 billion over the past three years to buy smaller software firms. Its $8.5 billion acquisition of BEA Systems closed in April.

The company's market share in database software, which is the foundation of every information system, edged up to 49 percent last year from 48 percent in 2006, according to the Gartner market research firm. IBM ranked second at 21 percent and Microsoft third with 18 percent.

Oracle also is gaining ground in enterprise software, those integrated applications that support and streamline business activities. It has lately expanded into applications for the insurance and health-care industries.

Presence in a variety of information technology areas allows it to offer "one-stop shopping" to companies that prefer not to have to deal with multiple providers.

Consensus rating of Oracle shares by Wall Street analysts is "buy," according to Thomson Financial, consisting of 11 "strong buys," 10 "buys," six "holds" and three "underperforms."

Chief Executive Larry Ellison, the largest holder of Oracle shares, has a strong personality and no compunction about reveling in a number of extravagances, such as a yacht that reportedly cost $200 million to build.

The company faces increased competition from lower-cost support providers for Oracle products. Germany's SAP is a formidable foe and the leader in business applications, and Oracle's database software is a maturing business.

Earnings are expected to be up 15 percent for the current fiscal year ending in May and 15 percent for the following fiscal year. The five-year annualized return projection of 14 percent is in line with the application software industry estimate.

Q. I am unhappy with my shares of Fidelity Value Discovery Fund. Are they still worth holding? -- P.F., via the Internet

A. Recent events haven't been kind to its portfolio, which emphasizes financial stocks. Trimming back some energy holdings didn't help either.

Nonetheless, its significant holdings in JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. represent surviving banks that avoided most of the excesses of their peers. The fund also adroitly trimmed back its General Electric Co. stock because of the company's stressed financial business.

All this requires that an investor look beyond near-term results to see the light at the end of the tunnel. The fund, which is able to move around various market capitalizations, has an overall strategy of investing in securities undervalued in relation to a firm's assets, sales, earnings, growth or cash flow.

The $1 billion Fidelity Value Discovery Fund (FVDFX) is down 29 percent over the past 12 months to rank in the lowest one-third of large growth and value funds. Its three-year annual return of a 1 percent loss places it in the top one-fourth of its peers.

"I currently have Fidelity Value Discovery rated as a 'hold,'" said Jack Bowers, editor of the independent Fidelity Monitor newsletter in Rocklin, Calif. "I think probably the worst is over, and though we're not there yet, at some point the financial sector will outperform."

The fund has been managed since its December 2002 inception by Scott Offen, who previously managed several of Fidelity's industry funds. Although he is an accomplished stock picker, he is not yet one of the investment firm's most proven managers. Since Offen doesn't hang on to winners forever because he sees downside risk in doing so, the portfolio tends to have high turnover.

Financial services represent about 28 percent of the portfolio, with other concentrations in health care and technology hardware. Its top holdings recently were Exxon Mobil Corp., JPMorgan Chase, Bank of America, Johnson & Johnson, AT&T Inc., Chevron Corp., Pfizer Inc., Amphenol Corp., Wells Fargo and Exelon Corp.

This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has an annual expense ratio of 0.87 percent.

Q. Can I make a withdrawal from my 401(k) retirement account because of financial hardship? -- J.H., via the Internet

A. Although a withdrawal is something to be avoided, the recent financial crunch has led more people to withdraw from their 401(k) to cover pressing expenses.

"Not all plans provide for hardship withdrawals, so the employee needs to check with their plan to see if it allows it," said David Wray, president of the Profit Sharing/401(k) Council of America. "In addition, some firms are stricter about how they interpret hardship."

The IRS gives these examples of hardships representing immediate and heavy financial need:

-- Payment required to prevent eviction from a principal residence or to prevent foreclosure.

-- Funeral expenses.

-- Expenses for necessary medical care.

-- Purchase of a principal residence excluding mortgage payments.

-- Tuition and related costs for postsecondary education.

-- Certain expenses related to damages to a principal residence.

"Remember that a withdrawal is not a loan, Wray said. "If you make a withdrawal when you're under 59 1/2, you pay taxes on it, plus a 10 percent penalty."

If the employee has other resources available to meet the need, the IRS will not consider the request a hardship.