Last week’s answer

My founder invented a hunting shoe in 1911 and used the new U.S. Parcel Post service to sell them. In 1925, I began offering clothes and sporting gear. My fans have included Ernest Hemingway, Babe Ruth and Eleanor Roosevelt. I designed boots and equipment for troops in World War II and introduced a tote bag in 1944. By 1951, my store was open 24 hours a day, and I was mailing some 760,000 catalogs yearly. I got my own ZIP code in 1976. I’m known for outdoor gear and great customer service. You can’t buy shares of me, because I’m a private company. Who am I? (Answer: L.L. Bean)

ETFs

If you’ve read in the financial pages about Spiders and Vipers and Bears (oh my!), you’ve read about exchange-traded funds (ETFs). (We made up the Bears, though.) ETFs are funds (generally based on indexes) that trade like stocks. They’re worth learning more about and considering including in your portfolio.

Remember that The Motley Fool, among others, recommends index investing, where you invest in inexpensive index funds in order to match the market’s or index’s overall performance. ETFs offer one more way to index.

By investing in an ETF, you’re putting your confidence in the companies in its corresponding index. Here are ticker symbols and nicknames for some ETFs of some indexes: S&P 500 (SPY, Spiders), the Nasdaq 100 (QQQ, Cubes), Total Stock Market (VTI, Vipers), Dow Jones Industrials (DIA, Diamonds), Russell 2000 (IWM, iShares Russell 2000), MCSI Japan Index (EWJ, WEBS Japan).

With very low fees (generally lower than their mutual fund brethren) and tax-efficient, infrequent trading, ETFs permit you to diversify among groups of companies. They’re also among the least time-consuming of all investing strategies. If you want to match the performance of a specific market or sector instead of attempting to pick individual stocks, ETFs provide significant advantages.

ETFs are very flexible. They may be traded any time the stock exchanges are open. This actually provides the greatest criticism for ETFs. They’re almost too easy to use, and as a result, they’ve been used extensively as short-term investments, the complete antithesis of index investing. John Bogle, the father of index investing, has likened ETFs to shotguns, saying, “They can be used for self-defense, or they can be used for suicide.” Trading in and out of ETFs eats up any cost benefit by piling on trading costs.

ETFs have become big business, with firms such as Fidelity and Vanguard rushing to issue their own ETFs. Bond-based ETFs now exist, and the total ETF market measures more than $120 billion.

There’s much more to learn about these interesting beasts. For more on ETFs, click over to www.fool.com/Specials/2003/03072900etfs.htm or www.ici.org/funds/abt/ faqs_etfs.html. For more on index and mutual funds, click to www.fool.com/funds or www.indexfunds.com.

No admittance

If I own a mutual fund that invests in a company, can I attend that company’s annual shareholder meeting? — Pam Schulz, Culver City, Calif.

Probably not. In general, only a legal representative of the mutual fund, such as its manager, would be able to represent the fund as the shareholder of record.

What does a stock’s P/E ratio really mean? — Ellen B., Birmingham, Mich..

The P/E ratio (price-to-earnings) relates the stock’s current price to its annual earnings per share. It reflects how much you’d be paying per dollar of earnings at the current stock price.

Consider this example. Imagine that the Nin Nin Construction Supply Co. (ticker: NINNY) is trading for $45 per share, and its earnings per share (EPS) over the trailing 12 months totaled $3. Its P/E would then be 45 divided by 3, or 15. You might also look at its “forward P/E,” dividing its stock price by the coming year’s expected EPS of $4, and getting 11.25.

Compare the results with competitors to get a sense of how inexpensive or expensive the stock may be. If Boffo Hardware (ticker: BOFFO) has a P/E of 19 and a forward P/E of 14, then Nin Nin looks attractive by comparison. But remember that the P/E is just one of many factors you should examine. If Nin Nin is growing slowly, for example, saddled with a lot of debt, it’s less of a bargain. The more you learn, the better conclusions you can draw.

That little blue box

Jewelry giant Tiffany (NYSE: TIF) recently wowed investors, crushing analyst estimates for both revenue and earnings in its fiscal second quarter. The market expressed its awe by cheering the stock 2 percent higher, capping a 50 percent increase since March.

Revenue for the quarter rang in at $442.5 million, up 18 percent from the year-ago quarter. Growth was strong across all segments: 16 percent for U.S. retail sales, 14 percent for international retail sales, and 21 percent for Internet and catalog sales. Sales at stores open a year or more grew a fantastic 8 percent.

So much for a struggling economy, eh?

Strong sales in turn led to strong earnings, 27 percent higher than last year. A closer look, however, reveals some help from nonoperating factors: a lower tax rate (36.7 percent vs. 40 percent last year) and 1 percent fewer shares due to share buybacks. Isolating those, Tiffany’s pre-tax operating profits were up 15.9 percent — still outstanding.

Of greatest significance on the balance sheet, Tiffany held inventory in check, while debt increased dramatically year-over-year because of a decision to purchase the real estate surrounding the company’s flagship store in Tokyo.

It will be interesting to see how the company does in the quarters ahead with unemployment on the rise and declining levels of ready cash from mortgage refinancings. Given Tiffany’s P/E ratio of 27.5 times expected 2003 earnings, the market seems to have few concerns.

Technology provides fast lesson in game of stocks

Years ago, I bought a superconductor company on the advice of my broker. They were in the process of developing filters for cellular phone towers to minimize static, disconnects, etc. The company had a filter that worked, and the filter had already been tested by a major player in the telecommunications industry. The stock went from $17 to $31 in months. Then, it became apparent that the company had funding problems as it geared up to produce the filter. Every press release promised sales “in the future,” but the stock price plummeted. The best description is from the movie “Aliens”: “We’re on the express elevator to hell!” It plummeted to well below $1 per share. — W.H., Ames, Iowa

The Fool Responds: This is a great lesson — that a terrific technology is not enough to ensure success for a company. It needs to translate that into sales and must increase those sales (and earnings) over time. Some firms just don’t have enough money to take their offerings to market, or they have trouble convincing buyers to buy. It’s best to seek firms with established track records.