Archive for Sunday, November 30, 2003

The Motley Fool

November 30, 2003


Last week's question, answer

A leading transportation company, I run the largest railroad in North America, covering 23 states across two-thirds of the United States. I link every major West Coast and Gulf Coast port and provide service to the East through my major gateways in Chicago, St. Louis, Memphis and New Orleans. I boast 33,035 route miles, 47,000 employees, 7,094 locomotives and 90,877 freight cars. I'm America's largest chemical hauler, and General Motors is my second-largest customer. I transport more than 240 million tons of coal per year. Based in Omaha, I rake in $12 billion annually. Who am I? (Answer: Union Pacific)

Inflation confusion

I thought I understood inflation and deflation, but now I'm hearing about disinflation and reflation. Help. -- J.K., Gilbertsville, Pa.

As you know, inflation is what you get when the overall price of goods and services rises and the purchasing power of money drops. Deflation is its opposite, when prices in general fall.

Disinflation happens when the overall level of prices is still rising, but its growth rate is slowing. You might see this during a recession. Reflation occurs after a period of deflation, and is when money's value is pumped up, to get closer to a previous level.

A related term is hyperinflation, which is when inflation is extremely pronounced. In 1923 Germany, for example, prices skyrocketed more than 2,000 percent in just one month. Today that would shoot up the price of bread from a dollar a loaf to $21.

Wal-Mart talks weakness

Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) both reported higher third-quarter sales and earnings recently. However, it was Wal-Mart's words about the upcoming holiday shopping season that got the most attention.

Wal-Mart's sales slowed from August into September and then from September into October, as tax-rebate spending petered out. Target experienced a similar decline. When it came to talking about its fourth-quarter expectations, Wal-Mart was decidedly guarded.

Economists have been predicting that this holiday season would be stronger than last. That's an easy assertion to make, though, as last year's retail sales grew at their slowest rate in 30 years.

Wal-Mart CEO Lee Scott characterized consumers as "very cautious" and said that while he didn't think spending was slowing, he also "(didn't) see the strength that many of you in the investment community appear to see." Perhaps even more chilling is his observation that consumers are "timing their expenditures around the receipt of their paychecks, indicating liquidity issues."

If any one company's got its finger on the pulse of the American shopper, it's Wal-Mart. When the big dog talks about weakness, then, it worries everyone, and for good reason. Visions of shopping bags stuffed with goodies are already dancing in retailers' heads, but perhaps they will end up seeing more lumps of coal than anything else.

Satellite radio stocks show need for investigation

I had some money to invest and decided I liked the possibilities of XM Satellite Radio. I liked the service, liked the rising subscriber rates, etc. Also, I wanted to add to my rate of return by selling some covered call options.

XM was trading around $3.05 per share at the time. I really wanted to have 1,000 shares so I could sell an extra call. I couldn't afford them, though, so I decided instead to buy Sirius Satellite Radio, trading at $1.80. Of course I did no investigation other than a cursory look. I assumed they had pretty much the same chance of success. By December, Sirius' price had fallen to $0.50, which triggered my stop-loss order to sell my shares. This, of course, forced me to cover my calls. Sirius was recently trading around $2 per share, and XM was at $22. -- D.W.H., Ontario, Canada

The Fool Responds: Companies in the same industry can be very different in their offerings, strategies and, ultimately, their stock performance. Sirius recently reported 150,000 subscribers, compared to roughly a million for XM.

Study your turkeys

If you're tired of thinking about turkey leftovers, turkey sandwiches, turkey tetrazzini and turkey noodle soup, switch gears and reflect on your investing turkeys. Some turkeys are companies you never should have invested in. Other turkeys are investments in solid companies that you sold prematurely for a loss. A turkey retrospective will impart some valuable lessons.

First, examine your past turkeys. Make a list of all the stocks you've sold and the prices at which you sold them. (Use split-adjusted numbers such as those you'll find at Then check and see how they're priced today. If most of the stocks have since recovered and are doing well, you probably should've hung on. If they've fallen further in price, then you did well selling. Investors often jump ship prematurely at the first inkling of possible trouble. Remember that many terrific stocks go through periodic slumps.

Take note of how many turkeys you've sold. If you've got a big flock of them, you may have jumped into too many stocks without doing sufficient research first. If most of your turkeys are still in your portfolio, you've probably been putting off examining your holdings. Such due diligence is time-consuming but necessary. That's one reason why it's good not to own more than 10 or 15 companies -- it's hard to keep up with them all.

With any turkeys in your current portfolio, determine whether more patience is required or if the situation is hopeless. Are you holding on, just hoping to decrease your loss?

Like most turkeys, that reasoning doesn't fly. Imagine that you bought $4,000 worth of the Ocean State Clam Co. (ticker: KLAMZ) and it's now worth $2,000. You realize the company has little merit and you're out $2,000. Instead of hoping for a small rise in KLAMZ, you're probably better off putting that $2,000 to work in another stock with better prospects.

Remember: You want your money sitting in the most promising investments you can find.

Successful investors take the time to think about investing and to learn from their successes and screw-ups.

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