Last week’s answer

I was born 157 years ago, when two New Englanders prepared bicarbonate of soda for commercial distribution. My flagship brand name evokes limbs and tools. In 1986, more than 100 tons of it was used to clean 99 years of coal tar off the inner copper walls of the Statue of Liberty. Based in New Jersey, I’m involved in specialty chemicals, animal nutrition, and consumer products such as toothpaste, cleansers, deodorizers and home pregnancy tests. My brands include Lambert Kay, Nice’n Fluffy, Xtra, Arrid, Nair, Trojan and First Response. My annual sales top $1 billion. Who am I? (Answer: Church & Dwight Co.)

Basic vs. diluted

What’s the difference between “basic” and “diluted” earnings per share (EPS) that I see in financial statements? — K.P., Omaha, Neb.

Basic EPS is calculated by taking net income (also known as net profit), subtracting any preferred stock dividends, and then dividing by the number of shares of stock outstanding. If CocoLoco Inc. (ticker: CHUCHU), a designer of high-fashion train-wear, earned $50 million in its latest quarter and it has no preferred stock dividends and 25 million shares outstanding, then its basic EPS is $2.

But if CocoLoco is like many companies these days, it has issued stock options to various employees and may also have issued warrants, preferred stock and convertible debt. All of these might be converted into common stock. Diluted EPS incorporates many of these securities in its number of shares outstanding. (It counts “in-the-money” options, for example, which are those exercisable below the current market price.)

If CocoLoco’s diluted share count is 30 million, then its diluted EPS would be $1.67, a far cry from the basic $2. Pay attention to the diluted numbers, as they offer a more realistic share count. If you see a big difference between a company’s basic and diluted numbers, that means that your share of earnings is being diluted significantly.

What’s a trust? — I.G., Batavia, N.Y.

A trust is a legal tool, commonly a part of estate planning, where someone (a “trustor”) gives control of some property to someone else or an institution (the “trustee”).

This is done for the benefit of someone else (the “beneficiary”). The beneficiary owns the property, but the trustee has control of it — usually for a limited period of time (perhaps until the beneficiary reaches a certain age).

Investment clubs

Have you ever considered forming or joining an investment club? You should. In these clubs, folks typically pool their money, their brains and their time, making investments together.

There are many such clubs across America, with some 25,000-plus clubs registered with the National Association of Investors Corp. (NAIC). Clubs typically have 10 to 20 members and meet once a month. Members each contribute about $20 to $100 monthly to a pooled account, research stocks individually or in small groups, present their findings to the group, and vote on investments.

Clubs are ideal for beginning investors, as members can learn together in a comfortable group setting. Even savvy investors can benefit, leveraging valuable resources such as time. If you can thoroughly research one company per month and then meet with 10 similar people, together you can cover 132 companies in a year.

Clubs can improve your discipline, too. On your own, you might be tempted to act on hot tips or to trade frequently. In a club, you’re usually bound by your partnership agreement to study a stock carefully before voting on whether or not to invest in it. The NAIC’s member clubs tend to own such solid, leading enterprises as GE, Pfizer, Home Depot, Microsoft, Merck and PepsiCo, hanging on for years, not months or weeks. These are the kinds of habits that can lead to market-beating performances.

Investment club members tend to have a good sense of perspective, as well. In recent market downturns, when Wall Street professionals and individual investors alike have scrambled to sell stocks, Foolish individual investors and club members have often calmly held on. In fact, they tend to be excited about bargains to be found.

Investment clubs can be terrific. Learn more about them at www.better-investing.org, www.bivio.com and www. fool.com/investmentclub. There are also many helpful books on investment clubs, such as “Starting and Running a Profitable Investment Club” by Thomas E. O’Hara and Kenneth S. Janke (Times Books, $15) and “Investment Clubs: How to Start and Run One the Motley Fool Way” by Selena Maranjian (The Motley Fool, $15).

Next week we’ll offer tips on running a club.

Selling too soon

In 1965, my broker got me 100 shares of University Computing Co. at its initial public offering (IPO) for around $4.50 per share.

Two days later, he called to say the stock had hit $7.25, so I sold, making a $260 profit. While I earned roughly 60 percent on the deal, I lost out on several thousand percent I might have made, had I hung on to those shares for many years. The firm became Electronic Data Systems, or EDS, and is now worth more than $10 billion. Now I sell half when any of my stocks double, but I keep the other half. — Bernard Eder, Olivette, Mo.

The Fool Responds: Short-sightedness is a common investor mistake, though at least you exited your position with a profit, which beats many other mistakes. It’s helpful in investing to have a long-range mind-set and a sense of a company’s growth potential. If the firm has sustainable competitive advantages and is executing its strategies well, hanging on for the long run could net you greater profits. Selling part of your position, as you do now, can help you hedge your bets, too.

Target misses the mark during second quarter

Target (NYSE: TGT), the country’s second-largest retailer and owner of Target stores, Marshall Field’s and Mervyn’s, recently reported second-quarter results that left investors cold. Sales at Target locations open more than one year rose just 1.5 percent year over year, less than half Wal-Mart’s corresponding 3.2 percent gain.

While Target has been a noted clothing retailer for years, Wal-Mart recently entered the fray with threads and brand names (including Levi’s) strong enough to swipe business from the likes of Target.

Tough competition and declining department store prices unraveled Target’s second-quarter results enough to disappoint investors.

Net income rang in at $358 million, up 4 percent from last year’s $344 million. Total sales climbed 9 percent to $10.9 billion, bolstered by an 11 percent revenue gain at the Target chain.

New store openings and Target’s growing credit card business accounted for a bulk of the increase.

Meanwhile, at Marshall Field’s and Mervyn’s, Target’s two higher-priced department store chains, sales declined 3.4 percent and 7.3 percent, respectively.

Target continues to manage inventory well, but its cash balance remains in decline, down to $430 million from $1.7 billion a year ago, while long-term debt is mounting, now topping $11 billion. The company rarely generates free cash flow, and when it does, it’s slight.

Target’s $40 stock, up 30 percent this year, trades at a forward P/E ratio of about 20. At this price, there’s no discount for stock shoppers here.