ASK THE FOOL
Favor undervalued buybacks
Are stock buybacks good or bad?
M.M., Fort Wayne, Ind.
It depends. In theory, stock buybacks, whereby companies buy back and essentially retire some of their own stock, are a great way to reward shareholders. That’s because fewer shares remain, with each worth more. Consider this extreme example: If you own 10 of a company’s 100 shares, you own 10 percent. But if it buys back 50 shares, your 10 now make up 20 percent of the company.
Since valuable company cash is spent buying back shares, companies should only be doing so when the shares are undervalued. If a company is buying back shares at inflated prices, it’s destroying value. That money would be better spent paying out a dividend, paying down debt, being reinvested in the business or in a number of more profitable ways.
I’m getting tired of hanging on to my loser stocks and waiting for them to recover so that I can get back some of my lost money. What should I do?
D.C., Las Cruces, N.M.
If a company has some temporary trouble and your research suggests it still has strong prospects, hang on. But if you’ve lost faith in the company, why try to earn a certain amount in it when you can more reliably earn that same amount or more elsewhere?
Imagine that your shares of Meteorite Insurance (ticker: HEDSUP) are underwater by $1,000, and you know of some other more promising companies. If you sell your Meteorite shares for a loss and move what’s left into one of those companies, you’re more likely to earn that $1,000 back – and more. Keep your money invested in your best ideas.
Based in Cleveland, I trace my history back to 1866, when my innovative founders decided to offer ready-to-use paint. Today, with more than 40,000 employees, more than 4,100 locations and more than $10 billion in annual sales, I’m the largest paints and coatings producer in the U.S., and among the largest in the world. I sell to professional, industrial, commercial and retail customers, and my brands include my own name as well as Dutch Boy, Krylon, Minwax and Thompson’s Water Seal. My stock has averaged annual gains of 17 percent over the past 20 years. Who am I?
Last week’s trivia answer: D.G. Yuengling & Son
MY DUMBEST INVESTMENT
‘Because we always go there’
Years ago, my wife and I decided to put some money to work in the stock market for the long haul. Using “professional” tips from publications and financial TV shows, I picked a few stocks. My wife picked a retailer “because we always go there,” and a cement company “because there’s construction using concrete everywhere.” Well, my stocks sank and hers have been steadily moving upward.
Mike G., Iowa Park, Texas
The Fool responds: Plenty of financial gurus on TV and in print are savvy investors, but they make some bad calls, too. And some aren’t that skilled and may be promoting one of their own stock holdings, hoping to give it a boost.
A retailer you frequent isn’t necessarily a great buy, but it does help to focus on companies you know well. You may be likely to notice if they start slipping or falling out of favor with other consumers. It’s smart to look around you for promising companies and trends. Be sure to consider simple index funds, too – they tend to beat the pros.
Don’t do everything on own
It’s admirable to want to do many things yourself, such as change your car’s oil or landscape your own yard. But some things are better left to the pros, such as taking out your appendix or removing a rabid raccoon from your garage.
Here are some times when you should consider consulting a financial adviser:
▪ When you’re getting married. You’ll need to decide how to blend your finances and arrange your accounts. Your new status can even save you money, such as if you get added to your partner’s superior health plan.
▪ When you’re considering buying a complex financial product, such as disability insurance, long-term care insurance or another insurance product, such as an annuity.
▪ When you’re buying or selling a home. These transactions involve big sums of money. Some guidance can help you save money and make sound decisions. (For example, if you’re selling a primary residence, you may be able to save tens of thousands of dollars in taxes.)
▪ When you’re trying to make sense of employee stock options you’ve received.
▪ When you’re getting divorced. An adviser can help you answer questions such as whether you can still file taxes jointly this year.
▪ When you’re saving for college. You’ll want to learn about all the programs and savings tools available to you.
▪ When it’s time to design your retirement plan. We all should have one, even if we’re in our 20s or 30s, and the earlier you start, the easier it will be.
▪ When you want to design an estate plan for yourself, or to help your parents do so. You’ll need to decide whether to set up a trust, and what all your options are.
▪ When a parent dies. You may be the executor of the estate, but you might not understand all the complexities involved.
THE FOOL TAKE
The ‘Big Bang’ investment
CBS (NYSE: CBS), with properties such as The CW, Showtime Networks, TVGN, Smithsonian Networks and Simon & Schuster, has great growth opportunities for the future and a fallen stock that seems undervalued now.
CBS is a company in transition, moving toward a stronger business model that’s less focused on advertising and more on creating its own content to air and license out. It already has complete ownership of some of the most popular shows on TV and more than 70 percent of its total lineup.
With top-rated TV series such as “NCIS” and “The Big Bang Theory,” the company has led broadcast networks in Emmy nominations. Furthermore, CBS recently announced its own stand-alone Web subscription service, giving it even more control over its created shows.
More content creation can fatten the company’s bottom line as these series are picked up for lucrative deals not just in the U.S., but internationally. For instance, “NCIS: New Orleans,” one of the company’s most popular series, already has a large international deal in place, and CBS expects to bank as much as $5 million in revenue per episode.
CBS stock was recently trading with a price-to-earnings ratio of just 10.7, and it’s also financially healthy, with relatively low debt and industry-leading gross profit margins. Tune in and see if it’s a good fit for your portfolio.