Archive for Sunday, September 16, 2001

9/16 Motley Fool for Sunday

September 16, 2001

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Q: How do reverse mortgages work, and do they make sense for most people? -- W.H., Panama City, Fla.

A: With a reverse mortgage, a homeowner receives a lump sum or regular payments, based on the equity of his or her home, usually to help fund retirement. There isn't space to explain it in great detail, but here are some things you should know:

Reverse mortgages are not always a good deal. The points and fees charged on them can be fairly high, and their interest rates tend to be considerably higher than those for regular mortgages. The cash flow you can expect from a reverse mortgage is determined by your home's value, interest rates and your age. Those who are 62 years old or older and who have little or no debt stand to benefit the most from reverse mortgages. Loan programs vary widely in what they offer and how much you'll get, so shopping around is critical. Retiring the debt usually means selling the home -- often upon the death of the borrower.

The bottom line is that reverse mortgages are generally far from the best way to finance a retirement. Consider getting a home equity loan instead. Alternatively, you might just sell your home, move to a less expensive dwelling, and invest and live off the difference.

Learn more at www.hud.gov/buying/rvrsmort.cfm, www.consumersunion.org/finance/revconwc899.htm and www.fool.com/homecenter. Or read "Mortgages for Dummies" by Eric Tyson and Ray Brown (Hungry Minds, $16.99).

Q: Where can I learn more about various kinds of insurance? -- U.P., Janesville, Wis.

A: There's a wealth of information at www.fool.com/insurance, www.quicken.com/insurance and www.insure.com. Or read "The Complete Idiot's Guide to Buying Insurance and Annuities" by Brian H. Breuel (Alpha Books, $16.95).

THE FOOL SCHOOL

Kinds of Companies

Here are some definitions of different terms you may have heard describing various companies and their stock.

"Cyclical" companies react strongly to economic change. During recessions, people often put off major purchases such as cars and refrigerators. Thus, manufacturers of automobiles and large appliances are cyclical. Companies less affected by the economy are "defensive." These include pharmaceutical firms. If you're taking heart medication, you're probably not going to stop because of an economic downturn.

"Seasonal" companies experience significantly different levels of business at various times of the year. Department stores, for example, see sales surge during the Christmas season. Swimming pool companies operate mainly in the summer.

"Blue chip" companies have been around a long time and are known for being solid, relatively safe investments. They're steady growers and usually pay dividends. Some examples: GE, ExxonMobil, Johnson & Johnson. At the other end of the spectrum are "speculative" stocks. These are typically young, obscure and risky companies, many of which promise great things (such as cures for cancer or loaded gold mines) but have yet to prove themselves.

"Growth" stocks are growing faster than the market average. They usually don't pay any dividends, as they need their cash to continue growing. Their stock prices often go up -- and sometimes down -- quickly. Aggressive investors favor growth stocks. Some examples: Microsoft, Oracle, EMC and eBay. (Railroad and telegraph businesses were growth companies once -- but things change over time.)

"Value" stocks are favored by investors looking to buy the proverbial "dollar for 50 cents." These firms tend to be temporarily out of favor, with depressed stock prices.

"Income" stocks may not grow too quickly, but they pay fat dividends. They're sort of like bonds, which pay you interest. Traditionally, utility companies have paid high dividends. Today many real estate companies do. People in or near retirement, relying on dividends to supplement pensions or savings, often favor income stocks.

Know that a company may fall into several of these categories. Learn these terms and concepts (and drop them in conversation), and you'll be the savviest Fool on your block.

MY SMARTEST INVESTMENT

Buying Up Banks

In 1995 I became aware that a lot of smaller banks were being bought out by larger banks. I was not a wealthy person or a gambler, but after discussing the observation with my wife, we decided to invest the minimum investment, $2,500, in Fidelity's Select Regional Banks Fund. That was one of the smartest investments that I have ever made. In 1999 I decided that most of the buying out was done and sold the shares for $12,800. -- Dick Francies, Englewood, Fla.

The Fool Responds: Spotting trends and taking advantage of them before the rest of the investing world catches on is a terrific way to profit. Good for you, acting on your observation and not assuming that you had to be wealthy to invest. We advocate buying stock in solid, promising companies and aiming to hang on as long as they remain promising -- ideally for decades. But that doesn't mean that you can't take advantage of short-term opportunities when you spot them.

Foolish Trivia

In 1876, my 18-year-old founder, whose name I bear, opened a candy store in Philadelphia that soon failed. In 1903, he began building the world's largest chocolate plant, where I mass-produced milk chocolate. Today I sell more than $4 billion of goods annually in more than 90 nations. My brands include Almond Joy, Jolly Rancher, Kit Kat, Milk Duds, Reese's, Sweet Escapes, Twizzlers, Whoppers, York and more. With no children of his own, my founder built a school in 1909 for children whose family lives have been disrupted. Today more than a thousand kids learn on its 10,000-acre campus. Who am I?

Last Week's Trivia Answer: Born in 1846 and based in Dayton, Ohio, I'm a real back-to-school company, with $4.4 billion in annual sales of coated paper, coated paperboard, packaging, consumer and office products. I produce nearly 2 million tons of paper each year and sell fancy stationery under the Gilbert name. My other consumer brands include First Gear, Time Line, Day Minder and Ready Reference. You'll see my own name on items in many students' backpacks. I make some people think of fermented honey-and-yeast drinks, and I recently agreed to merge with my rival, Westvaco. Who am I? (Answer: Mead)

The Fool Take

Eyeing the Eagle

Fashion is a fickle business, but apparel retailer American Eagle (Nasdaq: AEOS) has produced solid returns for investors over the last five years. The company enjoyed robust results in its most recent quarter, as the mall magnet increased sales by 40 percent over the year-ago quarter, to $292.4 million. Despite a slump in the Midwest, sales in its stores open longer than a year grew by 4.6 percent and profits soared more than fivefold to $0.21 a share.

While impressive, the results were in line with analysts' heightened expectations. In a troubled retail sector, American Eagle has been a survivor. Wall Street has taken notice: The stock price has quadrupled since fetching as little as $7.88 a share last summer.

After flying high this past year, it seems as if the Eagle has landed, though. In the current late-summer quarter that includes the critical back-to-school shopping season, the retailer is expecting to grow earnings by only 10 percent to 15 percent. Analysts were expecting a 20 percent jump in bottom-line profits.

Long term, American Eagle has room to grow. It has about 600 namesake locations and another 110 Bluenotes/Thriftys stores in Canada. Its lifestyle clothing has been a hit with young casual consumers. While apparel companies make for volatile stocks, American Eagle is worth a closer look.

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