The Motley Fool - Samples
by David Gardner and Tom GardnerASK THE FOOL
Losses per Share
Q: Should I avoid companies reporting increased losses per share instead of increased profits? -- D.Y., Lawrence, Kan.
A: Maybe, but not necessarily. Companies sometimes make or spend a lot more in one year than another -- perhaps because they've introduced a popular new product or have ramped up their research expenditures.
Imagine the young Wireless Pie Co. (ticker: WIPIE), which delivers pies electronically. Let's say it lost about $20 million in 2002 and $60 million in 2003, though its revenues nearly doubled during the same period. Some investors see numbers like this and run the other way, preferring to invest only in companies reporting steadily increasing profits. That makes a lot of sense. But those willing to take on more risk may buy, thinking that for emerging start-ups like WIPIE, this is the time when they should plow available money into advertising and growing the business. They reason that the time for profits is later, once the company has amassed a huge wireless pie-loving customer base.
By the way, we had some fun with an imaginary pie-topping company for one of our annual April Fools' Day jokes. Click over to www.emeringue.com for some laughs.
** ** **
Q: What's a company's "payout ratio"? -- S.G., Kinston, N.C.
A: It's the percentage of net income the firm pays out to shareholders as a dividend. If Cheese Sciences Inc. (ticker: CURDS) pays an annual dividend of $2 per share and earns $10 per share, its payout ratio is 20 percent.
When a firm returns much of its earnings to shareholders, then less is being reinvested in operations or spent on growing the business. However, that's not necessarily bad. Sometimes reinvested earnings would return less than shareholders could get investing the payout on their own.
** ** **
FOOL'S SCHOOL
A 12b-1 Fee Fuss
Pay any attention to your mutual funds, and you'll notice that they charge a host of fees. A fund's "expense ratio" (representing its operating expenses and management fees) is one way to get a handle on its overall annual fee bite, but it's good to poke around and get more details.
Along with the many recent mutual fund scandals and cries for reform, there's some outrage being expressed lately about the 12b-1 fee. It was created in 1980 with the intent of permitting funds to charge a little money in order to cover some administrative and marketing costs. The reasoning was that by attracting more investors, the fund would become bigger and could lower its expenses by realizing some economies of scale. There's some logic in that. There's some irony, too, though, since investors are essentially being charged a fee in order to lower their fees.
There's also a lack of logic in the fee. That's because the bigger a fund gets, the harder it often becomes for the managers to deliver market-beating results. As a fund swells to contain many billions of dollars, it's no longer able to easily make a profit on smaller companies. Even if it bought some exciting, fast-growing companies outright (which it can't do), they would still be a drop in the bucket, overall performance-wise. So when big funds charge 12b-1 fees, they're asking investors to cough up money in order to possibly make the fund perform more poorly. Oy.
Making matters even more confounding is this: Some funds that have closed their doors to new investors (often a good thing, preventing the fund from getting too big and therefore underperforming) are still charging 12b-1 marketing fees. Hmm ...
Our friends at the Securities and Exchange Commission (SEC) have been looking into possible abuses of the 12b-1 fee, and some reforms may be in the offing. Drop by www.sec.gov for the latest developments and for information on how to share your thoughts with the SEC.
In the meantime, take matters into your own hands, and learn more about the fees your funds are charging you at www.fool.com/mutualfunds/mutualfunds.htm and www.sec.gov/answers/mffees.htm.
** ** **
MY DUMBEST INVESTMENT
All That Glitters
When I wanted to spice up my portfolio with some aggressive funds, my financial adviser recommended a mutual fund containing a gold-mining stock that was increasing rapidly in value (Bre-X Mining Co.). He had a fancy MBA degree, and I was an investing neophyte. So I relied on his expertise and bought. Soon after, Bre-X's chief geologist "fell" out of the company helicopter into the Indonesian jungle they were surveying. It turned out that the company was salting core samples and there was much less gold in the ground than it had claimed. Share prices plummeted faster than the unlucky geologist. I learned that just because someone has an MBA or CFP after his name doesn't mean he knows more than you about a certain company. -- Glen Hays, Troy, Mich.
The Fool Responds: That's very true. Few business schools offer courses in gold mining, after all. You can learn more about this famous case of corporate fraud in "Bre-X: The Inside Story" by Diane Francis ($25, Key Porter Books).
** ** **
FOOLISH TRIVIA
Founded in 1981 and headquartered in New York City, I help students and schools successfully handle standardized tests (such as the SAT, ACT, GMAT, MCAT, LSAT, GRE and USMLE) and admissions to college and graduate school. I offer classroom and online test preparation courses, private tutoring, and educational Web sites. My Embark management tools help universities process admissions and recruiting. I've also authored more than 190 print and software titles on everything from test preparation to summer internships to college ratings. I went public in 2001 and am valued at $225 million today. Who am I?
Last Week's Trivia Answer: I trace my roots back to Iowa in 1893. The wooden-tub washing machine I introduced in 1907 proved so popular that I abandoned farming products to focus on it. Today I'm America's third-largest home appliance maker. I rake in some $4.7 billion annually in sales and am one of "America's Most Admired" companies. My washers, dryers, dishwashers, refrigerators and ranges carry my own name, as well as the Jenn-Air, Amana, Magic Chef and Jade names. I also own the Hoover floor care brand and Dixie-Narco, a leader in refrigerated soft drink and specialty vending machines. Who am I? (Answer: Maytag)
** ** **
THE MOTLEY FOOL TAKE
High-Yield Appeal
Many stocks pay dividends -- cash payments to investors. With rates on money markets and certificates of deposit so low, some investors are looking for income from stocks with high dividend yields. Here are three to consider. They're not growing quickly but are reasonably priced, with low price-to-earnings (P/E) ratios.
Remember that the dividend yield is the company's annual dividend divided by its current stock price.
-- Sara Lee (NYSE:SLE) is expected to grow by just 6 percent annually in the near future. Its brands include Sara Lee, Wonderbras, Hanes and Jimmy Dean sausage. The dividend yield is 3.5 percent.
-- Mack-Cali Realty (NYSE: CLI) is a real estate investment trust (REIT) specializing in office properties in the Northeast. It has kept occupancy rates high in both good and bad economies. The stock is now trading near its 52-week high, but it sports a 6.2 percent dividend yield.
-- Gallaher Group PLC (NYSE: GLH) is the largest manufacturer of tobacco products in the United Kingdom. It makes Benson & Hedges, Silk Cut, Berkeley and Mayfair cigarettes. With any tobacco company, you should consider litigation threats. Gallaher has had relatively few cases pending against it, and there has never been a decision against it. Growing at about 6 percent annually, Gallaher's dividend yield is 4 percent.
If any of these firms intrigue you, study them further before investing. For more high-yield companies, check out our Income Investor newsletter at www.FoolMart.com.
(EDITORS: For editorial questions, please contact Greg Melvin at gmelvin@amuniversal.com.)
COPYRIGHT 2004 THE MOTLEY FOOL
ASK THE FOOL
Ticker Symbols 101
Q: What can you tell me about stock ticker symbols? -- M.C., East Providence, R.I.
A: A ticker symbol is a short identifier for a company's stock. Companies that trade on the old respected "big board," the New York Stock Exchange, have three or fewer letters in their tickers -- for example, K for Kellogg, and XOM for ExxonMobil.
Those trading on the smaller American Stock Exchange also have three letters. Tickers of stocks trading on the Nasdaq Stock Market have four letters (such as MSFT for Microsoft and SBUX for Starbucks). Sometimes you'll see a fifth. If so, it's not technically part of the ticker -- it's tacked on to reflect something about the company. For example, an F means it's a foreign company and a Q means it's in bankruptcy proceedings.
Many companies have chosen amusing ticker symbols for themselves. For example: Southwest Airlines (LUV); Yum! Brands (YUM), the parent of KFC, Taco Bell and Pizza Hut; explosives specialist Dynamic Materials (BOOM); Internet America (GEEK); Olympic Steel (ZEUS); and amusement park company Cedar Fair (FUN).
To look up a company's stock ticker symbol online, click over to http://finance.yahoo.com/l. If you're not online, call the company or your brokerage and ask. Newspaper stock lists also usually include a company's ticker symbol.
** ** **
Q: I want to learn to invest in stocks. What can I read that's not too complicated? -- M.L., Lake City, Fla.
A: Books by Peter Lynch (with John Rothchild) are great for beginners, as are the www.better-investing.org, www.morningstar.com and www.Fool.com Web sites (if we may say so ourselves). When you're ready to open a brokerage account, visit www.broker.Fool.com or the "Benchmarks" page at www.gomez.com for more info.
** ** **
FOOL'S SCHOOL
Going 'Short'
Success in investing boils down to buying low and selling high, right? True enough, but you can also profit by reversing that order, by selling high and then buying low. This is called "shorting."
Imagine that Farm Dogs Inc. (ticker: BINGO) has gone public. Despite much media hoopla, you have little faith in it and expect the stock to sink. You call your brokerage and say that you want to short BINGO. The brokerage will "borrow" shares from a Farm Dogs shareholder's account and sell them for you. Then, assuming the share price does drop, you'll "cover" your short, buying shares on the market at a lower price to replace the ones you borrowed. If you shorted BINGO at $50 and covered when it fell to $40, you made $10 per share (less commissions). This technique sounds weird, but it's legal and done often.
Shorting can be beneficial because with shorts in your portfolio, you might profit from any kind of market. If you see a stinker, you can profit by betting against it. Shorting can bolster a portfolio, too. If the market takes a big drop, your shorts will likely fall, boosting your portfolio's performance.
But shorting has its downside, too. If the stock price rises, you lose. With shorts, you can earn only up to 100 percent, since a stock price can't fall lower than zero. But if your short keeps rising (going in the wrong direction), your downside is theoretically unlimited. Since you can actually lose more than 100 percent of your money, you need to keep a very close eye on any shorted stocks.
Other dangers: Sometimes companies you're sure are overvalued just keep going up anyway. Shorting is based on short-term expectations, and we generally prefer to focus on the long term. Shorting bucks the overall long-term upward trend of the market. And if you short a company, you'll have its management working against you to make the company succeed, perhaps with new financing, partnerships or products.
Shorting can be effective, but it's only for seasoned investors. Many experienced investors do well without, too.
** ** **
MY DUMBEST INVESTMENT
A Dumb Non-Investment
In 1998, I had a few dollars to invest somewhere for five years or more. My wife and I had been doing a small business on eBay. We thought eBay was great -- really great. We were out of town when the news broke about eBay going public. By the time I found out, the shares had been issued and grown significantly. I didn't buy shares at that time but should have done so. Alas! -- Marion Leonard, Tucson, Ariz.
The Fool Responds: Shares of eBay, initially priced around $18 per share, more than doubled on their first trade and ended their first day in the $40s. Since then, the stock has increased in value more than 1,600 percent (including several splits). But consider this -- if you bought shares only a year ago, you'd be up more than 60 percent. If you bought two years ago, you'd be up more than 130 percent. The stock won't keep growing at such a rapid rate forever, but it may well not be too late to jump in, if your research suggests that eBay's long-term future is very bright.
** ** **
FOOLISH TRIVIA
I was founded by two fellows as a small machine shop in Baltimore in 1910. Today I make and sell power tools and accessories, hardware and home improvement products, and technology-based fastening systems in more than 100 nations. My brand names include DEWALT, Momentum Laser, Emglo, Kwikset, Price Pfister, Geo, Bach, Emhart Teknologies, HeliCoil, Gripco and Tucker. My power tools division generates nearly three-quarters of my sales, while hardware and home improvement contribute nearly 20 percent. In 2003, I took in $4.5 billion, and my net profit was nearly $300 million. Who am I?
Last Week's Trivia Answer: Founded in 1981 and headquartered in New York City, I help students and schools successfully handle standardized tests (such as the SAT, ACT, GMAT, MCAT, LSAT, GRE and USMLE) and admissions to college and graduate school. I offer classroom and online test preparation courses, private tutoring, and educational Web sites. My Embark management tools help universities process admissions and recruiting. I've also authored more than 190 print and software titles on everything from test preparation to summer internships to college ratings. I went public in 2001 and am valued at $225 million today. Who am I? (Answer: The Princeton Review)
** ** **
THE MOTLEY FOOL TAKE
The Wal-Mart Monster
Wal-Mart (NYSE: WMT) recently reported its fourth-quarter and full-year results, featuring a 12 percent year-over-year jump in annual revenues, topping a quarter of a (BEGIN ITALS)trillion(END ITALS) dollars. Those are fantastic results from the world's No. 1 retailer.
Sales at Wal-Mart stores increased 4.4 percent in the quarter, only to be surpassed by a 6.7 percent gain at Sam's Club stores. International operations continued to boom, with sales up 17 percent in the quarter and year. Every bit as important, much of this growth flowed to the bottom line, as the company's net cash position nearly doubled to $5.2 billion.
In a conference call, management noted that apparel had been marked down to get inventory in line for spring merchandise. But gross profit margins were better than forecast and increased for the ninth time in 10 quarters.
Wal-Mart's performance should frighten its peers both in supermarkets and broader retail. Safeway, Albertson's and Kroger all have narrower margins and would die for Wal-Mart's 26 percent increase in supermarket sales for the quarter. Wal-Mart's operating margins are nearly double those of Costco. Target does manage higher margins, but also has more debt.
All this stellar financial performance doesn't come cheap. With a P/E ratio around 29, Wal-Mart's execution is clearly reflected in the stock price. Still, with guidance calling for more double-digit earnings growth, retail investors may find value in Wal-Mart.
(EDITORS: For editorial questions, please contact Greg Melvin at gmelvin@amuniversal.com.)
COPYRIGHT 2004 THE MOTLEY FOOL
