Advertisement

Archive for Sunday, June 20, 1999

MOTLEY FOOL

June 20, 1999

Advertisement

At What Price?

Q: How much difference does it make whether I buy stock of a great company at a fair price or at an overvalued price? As long as it goes up, won't I still make money in the long run? -- L.F., Columbus, Ohio

A: You're right to think of the long run, but there is a difference. You'll make less money if you're buying an overvalued company.

Consider the example of Holy Karaoke Inc. (ticker: HYMN), which we'll say is trading at a fair price of $10 per share. If it's expected to grow at 12 percent per year for the next 10 years, we can estimate that it will be at $31 per share then.

If you buy it at $10 per share, your total gain over the decade will be 210 percent. However, if you have to cough up $15 per share for it, it will return only a total of 107 percent on its way to $31. That's about 7.5 percent per year. Worse still would be buying it at $20 per share. Sure, you'd make money, but your total gain would be just 55 percent, or roughly 4.5 percent annually. You can profit without considering the price, but it does make a difference.

Q: Is it true that the stock market will soon be open longer each day? -- S.R., Charleston, S.C.

A: It looks that way. The Nasdaq may add a four-hour trading session from 6 p.m. to 10 p.m. (New York time) beginning this summer. The New York Stock Exchange is considering adding early morning and evening trading sessions. It doesn't make much difference to us Fools, though. As infrequent traders and long-term investors, a market open fewer hours would suit us just as well.

I'm known for my eponymous flagship product, but my line of snack brands is just as impressive. It includes Tostitos, Chee-tos, Doritos, Cracker Jack, Lay's, Ruffles, Fritos, WOW! fat-free chips, Funyuns, Sun Chips, Smartfood popcorn and Rold Gold pretzels. I recently acquired world O.J. leader Tropicana, as well. In order to make my business less capital-intensive and more profitable, I spun off my restaurants (KFC, Pizza Hut and Taco Bell), and I'm cutting loose my bottling businesses, too. I'm bubbling with excitement over my international growth potential. Who am I?

Commenting has been disabled for this item.