(MONEY Magazine) – Money funds hit all-time lows

The Federal Reserve's 11 interest-rate cuts in 2001 may be helping borrowers, but they've been a disaster for savers. Consider: After averaging 5.89% in 2000, money-market fund yields plummeted throughout the second half of 2001, hitting an all-time low of 1.64% on Dec. 18. Before 2001, no fund had yielded less than 1%; as of Dec. 18, 289 had fractional payouts, according to IMoneyNet, a fund tracking service.

Unfortunately, money-market funds offer liquidity that no other investment short of an interest-bearing checking account can match, meaning that savers who need immediately available funds have few options. If you can afford to have your money tied up for any amount of time, at least consider a six-month or one-year CD. Their yields are averaging 2.38% and 2.73%, respectively. Otherwise, you're not even beating inflation, now just 1.9%. --JEFF NASH

Palm slapped

Palm (PALM) is stumbling. Sales growth at the once hot maker of PDAs has stalled, profits will be negative for the second fiscal year in a row (which ends in June), and CEO Carl Yankowski resigned in November. Since its spectacular March 2000 IPO, Palm stock is down 96% to $3.50.

With its beautifully engineered hardware and easy-to-use software, Palm is often compared with Apple Computer (APPL). It even learned from Apple's mistakes by licensing its operating system to solidify its position as the industry standard. But other tech firms are smarter now too. "Big companies 20 years ago didn't recognize opportunities as quickly," says State Street Mid Cap Growth manager Catherine Dudley, who sold all her Palm shares last spring. Microsoft and Sony quickly moved into Palm's highest-margin segments--corporate buyers and high-end consumers. Palm's market share has fallen from 53% in 2000 to 30% last October (based on unit sales).

But Palm may present an interesting trading opportunity. Palm is widely rumored to be a takeover candidate. A buyout isn't imminent, because any acquirer would inherit a $7 billion tax liability related to Palm's spin-off from 3Com (COMS), but that liability expires in July. At that point, says Jurika & Voyles portfolio manager Nick Moore, Palm could be worth $4 to $7 a share, based on current fundamentals and the 18-million-unit installed base of the Palm OS. Apple seems to be the likeliest buyer. "Steve Jobs made a speech last January where he talked about the Mac being the hub of a universe of devices," says Todd Kort of the Gartner Group. "Certainly a PDA would be one of them." --JON BIRGER

America's most consistent stock

Since going public in 1961, Automatic Data Processing (ADP), the world's biggest payroll processor, has delivered double-digit earnings growth every year--and it's on target to do so a 41st time this summer. That's a record unmatched by any public company we're aware of, and Wall Street has noticed: In the 10 years ended Dec. 19, ADP's total return was 563% vs. 243% for the S&P 500.

By late December the stock had rebounded 34% from its September lows to $59 but was trading with a P/E of 34 times estimated 2002 earnings--in line with its five-year average of 36. ADP expects earnings to grow 13% to 15% for the fiscal year ending in June, and analysts believe the firm's streak can continue for at least the next few years after that. --J.N.

Bond buoys

MBIA (MBI) and Ambac (ABK) have bounced back from their post-Sept. 11 lows, but the nation's largest insurers of bonds used to fund municipal projects such as airport expansions and bridge repairs still look like good buys. Both are trading below their 52-week highs and offer long-term growth prospects that outpace the S&P 500 by at least six percentage points.

Even if governments miss a few bond payments (the root of investors' jitters following the terror attacks), MBIA and Ambac aren't likely to be hurt long term. Each is believed to have paid out less than 0.01% on $1 trillion in debt since the 1970s. What's more, muni bond clients pay premiums up front, which means that most of the insurers' profits are locked in for years.

Of the two, we prefer MBIA, the industry leader. MBIA's expenses are lower, and its portfolio's credit quality is higher. At a recent $52, its P/E is 12 times estimated 2002 earnings. Says John Spears of Tweedy Browne American Value: "I wouldn't be surprised if this company were valued in an acquisition at 15 to 20 times earnings." In other words, $65 to $87 a share. --A.C.