March 2001

Portfolio Comments

Market View

Is there anything Dorato can do for you?

Dorato Capital Management's Mission

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Stock Focus: Comerica Inc.

Benchmarks, Goals, and Starting Points

Portfolio Comments

During the quarter, I sold Lucent Technologies in the taxable accounts for a loss. Locking in the loss now gives taxable clients the option to write off the loss against their 2001 income (up to $3,000) or to offset gains that we may want to take later in the year.

Because tax-deferred accounts receive no benefit from taking losses, Lucent remains in the tax-deferred accounts for now. While the company's financial situation has become less secure over the last year, Lucent is still strong enough to warrant holding onto the shares. In addition, the stock has above-average return potential if the new management team can turn the company around.

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 Market View

At the beginning of the year, Mr. Greenspan lowered interest rates. For a blissful month, investors in technology stocks were sitting pretty once again. Unfortunately, the joy didn't last. Somebody forgot to tell the companies that they were supposed to meet earnings estimates. Even the venerable Cisco Systems failed to meet analysts' expectations. Lately, companies outside of the technology sector are joining in the earnings downgrade parade.

Gloom is back. Poor Mr. Greenspan. A year ago, he would have been knighted Sir Alan, if only we were British. Now he's second-guessed by people who would have trouble identifying a supply and demand graph.

Some folks keep saying that stocks have hit a bottom and are poised to rebound. And they keep getting it wrong as stocks fall farther. But these folks will keep making predictions because if they get it wrong, no one will remember; if they get it right, they can crow for years to come.

Even now, some stocks are only re-entering the atmosphere rather than offering great buying opportunities. For example, Applied Materials, a manufacturer of equipment to make semiconductors, has fallen from $100 to $45 per share. Even at $45, though, the stock price doesn't look attractive. Investors seem to be banking on continued heavy spending by semiconductor companies for Applied's equipment, regardless of the economic environment. Perhaps investors are also thinking that the stock is on sale because it's down 55%. The danger is that we anchor our concept of what something is worth by what it recently traded for - no matter what that earlier price was based upon.

As stocks fall and investors get nervous, we always get the debate between the bulls and the bears. The Gloomy Gus crowd predicts the Dow at 5,000 (50% down); the Exuberant Eddie crowd predicts the Dow at 30,000 (date usually excluded). Mostly, this is a big waste of time, since predicting index levels is like playing pin the tail on the donkey. You shouldn't bet too heavily on hitting the right spot.

More useful than any prediction is the set of assumptions upon which it is based. We could see stocks fall much farther; but I think we would have to see some kind of serious shock to get us there, such as a prolonged war in the Middle East, complete with disruptions in oil supplies. The idea is that we'd have to see something to cause inflation to increase even as the economy slows, something that would cause consumers and businesses to lose confidence in the future and so pull back sharply on spending. Such a shock is not impossible; it's just not likely.

I tend to be a bit more optimistic about the future than the doomsayers. Already, interest rates are beginning to return to a more normal pattern, in which longer-term bonds carry higher yields than shorter-term bills. This means that the bond folks are beginning to price an economic recovery into the yield curve. That's pretty good news, since it was the bond market that last year correctly forecast the slowdown in economic activity we see today.

So what happens from here? I continue to believe that there are many good companies to buy at reasonable prices. I'm not excited about the really big companies that dominate the indexes, but in the finance, retail, industrial and, yes, even technology sectors, there are good companies to invest in that should provide decent returns over the next three to five years.

Steve TeSelle

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Is there anything Dorato can do for you?

Some of you prefer to use Dorato as an investment vehicle similar to a mutual fund account, in which funds are invested and Dorato has little additional involvement in your finances.  That’s fine.  But if you would like additional services, such as help with retirement planning, or devising a strategy for exercising stock options, or advice regarding other investments, please feel free to contact me.  Once you have an account with Dorato, these other services are available at no additional cost. 

What is Dorato’s mission?

To provide separate account management that meets the needs of each investor, and to educate and inform both clients and the general public about investment and financial issues.

Written pieces are available on the following financial planning topics:

College Savings Options

Retirement:  What’s the Target?

To get a copy, please call us at 303-733-4999, or e-mail me at steselle@doratocapital.com.

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Stock Focus

An Insight Into Dorato’s Investment Style

Comerica Inc.

Comerica is the 23rd largest bank holding company in the United States, with approximately $41 Billion in assets (end of 2000). Comerica has investment banking operations as well as investment management through its ownership of Munder Asset Management, but the bulk of its assets are in commercial loans. The company is based in Michigan, and operates primarily in Michigan, California, and Texas. At the end of January, Comerica completed its purchase of Imperial Bancorp, which gives Comerica a large presence in the California market and adds another $9 Billion to assets.

Comerica has achieved a happy balance between striving for better-than-average earnings growth and getting into risky lending. Earnings have increased at a 12-13% rate over the past decade -- on the high end for banks. Yet Comerica hasn't paid for this growth with risky loans. Comerica has consistently had a non-performing loan ratio lower than the average for all banks. Currently, non-performing loans stand at .76% of assets.

Analysts seem to be clumped around a 9-10% growth rate going forward, although Value Line believes the Imperial merger could cause the growth rate to be a bit higher. At $60 per share, the stock trades at approximately 12 times earnings (depending on whether you like to use trailing earnings or some combination of future and trailing). This seems to be a reasonable price for a solid, consistent company.

Finally, Comerica earns a return on equity in the mid to high teens, better than average for banks. Sometimes companies can show a high return on equity by using too much debt. But Comerica gets high marks for financial strength from both Value Line and Morningstar. The combination of a solid return on equity with a good financial rating points to a well-managed company.

As always, there are risks. One is that while Comerica has been managed well up to now, management could make some blunders going forward, especially as Comerica merges the operations of Imperial. Two is that the US economy goes into a severe recession. This would cause loan defaults, which would reduce the bank's earnings. And three is the risk of inflation. If inflation were to rear its ugly head, the Federal Reserve would have to raise interest rates, which would squeeze Comerica's profits.

Though different in type, each of these risks falls into the category of the unknowable. I don't know that each of the three risks described won't occur, but given Comerica's track record, I like the probability that management will continue to perform, regarding both the merger and the quality of the loan portfolio. I also have confidence that the Federal Reserve will not allow an extended period of high inflation.

As always, I recommend that investors diversify. Comerica looks like a solid investment for the long haul, but not everything turns out as we plan. Not only could one of the risks described above come to pass, but other events could occur, unforeseen by your faithful investment professional. As a stand-alone investment, I'd give Comerica a resounding maybe. As part of a diversified portfolio, I think an investment in Comerica makes a lot of sense.

Steve TeSelle

Sources: Bloomberg, Comerica, EDGAR filings, Value Line, Morningstar

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Benchmarks, Goals, and Starting Points

A Short Discussion

Performance benchmarks are vital. They give both the investor and the portfolio manager a means to measure how the investor's portfolio is performing. But benchmarks and portfolio performance are only part of the investment picture. Investors who focus only on performance may fail to meet their investment goals because they haven't explicitly identified what those goals are.

No matter the goal - retirement, saving for college, whatever - the starting point is where you stand today. Specifically, you need to have a snapshot of your personal balance sheet (assets and liabilities) and an annual budget. Armed with these two pieces of information, you can then start to get into realistic discussions about where you'd like to be in the future and how you get there.

Let's say your goal is to save enough for retirement. Okie-dokie. You have to figure what "enough for retirement" means. With your balance sheet and budget, you have a clear picture of your current situation. Having a good understanding of your current budget helps you to formulate a realistic retirement budget -- one of the key factors in determining the retirement savings you need. Once you figure out the retirement savings you need, you can devise a plan for how to get there. Then, if your investments perform as you expect, you are likely to meet those retirement goals you so faithfully set. You see? It all comes together like peanut butter and jelly.

We'd all like our investments to do well. But you don't want to be in a situation where your investments have performed better than their benchmarks, yet you end up with a retirement budget so meager that a trip to McDonalds is a big night out. Better to spend a little effort up front and ensure that you end up meeting whatever goals you have.

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