site stats
The Motley Fool: Useful tips on investing |

The Motley Fool: Useful tips on investing

Bigger isn’t (necessarily) better

Q: When investing, should I look for or favor companies with high earnings per share (EPS)?

A: In isolation, a company’s EPS doesn’t mean much — except that, if it’s positive, the company has earnings rather than losses.


Imagine that Excelsior Hair Growth (ticker: SPROUT) has total net income of $50 million this year. If it has 50 million shares of stock outstanding, then its EPS is $1. ($50 million divided by 50 million is $1.) If it issues more stock, though, and suddenly has 60 million shares outstanding, its EPS will be lower, at $0.83. ($50 million divided by 60 million is $0.83.)

Now imagine two equally wonderful companies with identical net income. If one has half as many shares as the other, its EPS will be twice as big. That doesn’t mean that it’s a better or worse company. There’s no perfect number of shares for a company to have.

It’s more important to check whether the EPS has been rising over time. Examine many other numbers, too, to get a fuller picture. A company’s earnings can be manipulated legally via various accounting maneuvers.

Q: I’m a small investor. How much should I invest when it costs me $7 per trade?

A: Aim to spend no more than 2 percent of your investment on commission costs. So if you’re spending $7 on a trade, you should be investing at least $350. Some years ago, commissions could be $25 or much more. A $25 commission would require aiming for an investment of $1,250.

Remember to diversify, too, or opt for a broad-market index fund.

Insignificant losses

Dear Fool: I’m not ashamed to admit that my dumbest investments were when I got into penny stocks. I subscribed to a newsletter that offered “advice” on penny stocks for quick wins.

Around the same time, I was working for a small company, and a co-worker said he had a hot tip: Creative Edge Nutrition. It was going to make a fortune in the marijuana business. The stock hardly moved from what I bought at. I sank $300 into that one.

I still have these “oopsies” in my portfolio as a reminder not to believe anyone about anything, to do due diligence before making a move and that penny stocks are very risky. I’m lucky that my losses were insignificant. Four years later, I feel much better about playing the game of stocks.

The Fool responds: Even though a particular industry might seem like it’s poised to grow briskly, not every company in it will succeed. For best results, look for companies that have track records of growing revenue and profits. Remember that your hard-earned dollars are at stake. You can grow wealth without unnecessary risk.

Electric potential

Whirlpool (NYSE: WHR), the largest appliance manufacturer in the world, is trading at an appealing price for long-term investors. After years of growth, the company has experienced a few hiccups that have caused skeptics to flee its stock, dropping the price.

Whirlpool has had to deal with weakness in Europe, partly due to Britain’s looming exit from the EU, along with adverse currency fluctuations. While these factors have tempered growth for its appliances business, they’re likely to be just temporary speed bumps for Whirlpool.

With North America accounting for about half of total revenues, Whirlpool’s long-term strategy to infiltrate faster-growing emerging markets in Asia, Africa and the Middle East is unaffected by currency fluctuations and the growth hiccup caused by Brexit.

Investors should care most about how the company is performing from an operating perspective, and on that count, it’s doing well. Revenue in its latest quarter grew by nearly 4 percent over year-earlier levels, while earnings per share growth approached 5 percent. More important, revenue from Latin America and Asia grew by double digits.

Whirlpool’s dividend rose by 10 percent this year, yielding 2.4 percent. With its strong and diverse brands such as Maytag, KitchenAid, Jenn-Air, Amana and Hotpoint and a forward-looking price-to-earnings (P/E) ratio recently near 12, Whirlpool should appeal to value investors.

Category: Kitchenaid  Tags: ,  Comments off
You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

Comments are closed.