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Archive for Sunday, June 1, 2003

The Motley Fool

June 1, 2003

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Last week's answer

Founded in 1923 as a yarn company, I grew into America's first conglomerate. Today, based in Providence, R.I., I'm one of America's largest companies. Over time, I've gone from making parachutes and lingerie to industrial tools, golf carts and fuel tanks. Some of the brands under my roof include Bell Helicopter, Cessna Aircraft, E-Z-GO and Greenlee. My annual revenues top $10 billion and I have roughly 50,000 people on my payroll. Bell Helicopter is the world's leader in commercial helicopter production, and every 20 seconds, a Cessna Citation takes off or lands somewhere in the world. Who am I? (Answer: Textron)

Know the answer? Send it to us with Foolish Trivia on the top and you'll be entered into a drawing for a nifty prize! The address is Motley Fool, Box 19529, Alexandria, Va. 22320-0529. Send questions for Ask the Fool, Dumbest (or Smartest) Investments (up to 100 words), and your Trivia entries to Fool@fool.com.

Market cap

Can you explain what a company's "market cap" is? -- J.F., Greenville, S.C.

A company's market capitalization is kind of like a price tag -- it's the current value placed on it by investors in the stock market. Calculating it is simple. Just take the current stock price and multiply it by the number of shares outstanding. (Many online stock quote providers include shares outstanding and often the market cap, too.)

Imagine Scruffy's Chicken Shack (ticker: BUKBUK). Let's say it has 20 million shares outstanding and trades around $30 per share. Multiply 20 million by $30 and you'll get a market cap of $600 million. That's the current market value of the company. If you wanted to buy the whole company, you'd have to fork over $600 million -- or more, as buyouts generally occur above market prices.

Checking out the market cap of a company you're interested in can be enlightening. For example, if you're thinking of investing in Amazon.com, note that its market cap is around $11 billion. Compare that with Barnes & Noble and eBay, which sport market caps of roughly $1.3 billion and $30 billion, respectively. Does Amazon's value seem reasonable in comparison? It depends on your assessment of its potential.

What makes a company "large cap" or "small cap"? -- L.C., Green Bay, Wis.

There's no exact definition, and guidelines change over time, but here's one rough take: If a company's capitalization is $5 billion or higher, call it a large-cap; between $1 billion and $5 billion, a mid-cap; $250 million to $1 billion, a small-cap; and less than $250 million, a micro-cap. (This makes Scruffy's a small-cap enterprise.)

Down in smoke

My dumbest investment has nothing to do with poor research, bad management, etc. I invested in Philip Morris (now known as Altria Group) and hated it the whole time I owned it, not because of losses but because I felt guilty owning a tobacco company that produces a product that causes disease! What a mistake it was for me. I was rooting against the company (my company) and was even too ashamed to tell my wife we owned it. Oh sure, I tried to rationalize it with the excuse that only a portion of the revenues were due to tobacco, but that didn't work. The moral of the story is that there are factors other than balance sheets and income sheets that one should consider when investing. -- Eric B., Pueblo, Colo.

The Fool Responds: This is an important consideration for many investors. Make sure you're at least comfortable, if not downright proud of, what your companies do to earn their keep. Learn more about socially responsible investing at www.socialinvest.org, www.socialfunds.com, www. greenmoneyjournal.com and www.goodmoney.com, or in "Socially Responsible Investing" by Amy Domini (Dearborn, $20).

Banking on a cure for SARS

Two drug companies scored big gains last month, on news that they're developing treatments for severe acute respiratory syndrome, or SARS. But there's more than one reason for investors to be careful here.

Shares of Medarex (Nasdaq: MEDX) jumped 12 percent after it said it entered into an agreement with the University of Massachusetts Medical School in which it hopes to co-develop fully human antibodies to the respiratory illness. Meanwhile, GenVec (Nasdaq: GNVC) signed an agreement with the National Institutes of Health to begin development of a clinical grade vaccine for SARS. GenVec shares popped up 75 percent on the news.

Neither company indicated how long it might be before the treatments would be available, assuming either makes it through the testing and approval processes. These procedures typically take years.

Neither company has any products on the market. Medarex lost $2.09 per share in 2002, and had negative free cash flow of $108 million. It has $350 million in cash and short-term investments. Meanwhile, GenVec dropped $1.17 in earnings per share and sported $22 million in free cash flow, with $18 million in cash and investments.

This is not to say these aren't exciting developments for these two companies. GenVec, for example, will receive $420,000 for its efforts. But the odds are long that the treatments will even reach the market.

Investments in either -- especially based solely on the SARS developments -- can only be considered highly speculative and risky.

Investment accounts for children

Children stand to benefit the most from investing, but they can't have brokerage accounts of their own. You can still get them started early, though. Here's how:

Consider a trust fund, if you can afford it. You'll have to manage it yourself or pay someone to do so. It eventually becomes the property of your child, but he or she can't take control of it until reaching an age you specify.

Stocks bought for youngsters are frequently set up in Uniform Gift to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) accounts. The investments belong to them, but they can't take control of them until early adulthood. Until then, the custodian (probably you) controls the money for their benefit.

You can also open a simple joint brokerage account, which you control until the child becomes an adult. Note that whoever's Social Security number is on the account will face taxes on any gains. Since your children are probably in a lower tax bracket, their numbers might be the best ones to use. Learn more about these tax issues at www.Fool.com/taxes or www.fairmark.com/custacct.

A great way to get kids started is through dividend reinvestment plans (and direct stock purchase plans). They allow you to buy small amounts of stock at a time, directly from the company, bypassing brokers. Just ask a company you're interested in if it offers such plans. Before opening an account, learn more about these plans at www.directinvesting.com, www.netstockdirect.com or www.fool.com/School/DRIPs.htm.

Informal arrangements work, too. If you own stock in PepsiCo, you can "sell" your son a few shares. If you're buying 50 shares of Microsoft and your daughter wants to buy some, you can combine orders and buy 51 or 52 shares. Just keep track of which shares belong to whom. Once your kids become adults, they can open their own brokerage accounts and you can transfer their shares.

Teach your kids about money with "The Motley Fool Investment Guide for Teens" by David and Tom Gardner with Selena Maranjian (Fireside, $14), or with "TeenVestor" by Emmanuel Modu and Andrea Walker (Perigee, $13), or point them to www.Fool.com/teens.

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