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Archive for Sunday, June 27, 2004

The Motley Fool

June 27, 2004

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Last week's question and answer

My history began in 1933 when Vernon Rudolph bought a doughnut shop and recipe from a French chef. I'm based in Winston-Salem, N.C., today. My more-than-360 stores in 44 states and several nations make more than 7.5 million doughnuts per day -- nearly 3 billion per year. The sprinkles I use each year would fill 33 18-wheeler trucks. In 1976, I became a subsidiary of Beatrice Foods, but in 1982 a group of franchisees made me an independent company again. I went public in 2000, and my stock soared for years before slumping recently. Who am I? (Answer: Krispy Kreme Doughnuts)

Fortune hunting

Fortune Brands (NYSE: FO) continues to report strength across its diversified holdings, and its optimism may be a good reason to take a closer look at its stock.

Fortune has been firing on all cylinders lately, which is impressive considering the number of them in its engine. The firm sells a broad range of products, including Moen bathroom fixtures, Titleist golf clubs and Jim Beam whiskey.

The firm is good at teaming up with high-profile partners, joining with Starbucks, for example, to create a coffee-flavored liqueur. In recent years, Fortune also has teamed up with Sweden's Vin & Sprit, makers of Absolut vodka, to support its spirits category, and Home Depot, Lowe's and Sears to bolster its home-improvement products segment.

In addition, Fortune seems to be savvy at making smart acquisitions, an important feature for a holding company. The company's purchase of door-maker Therma-Tru, for instance, is projected to add $0.15 to earnings per share this year.

Who knew doors could be so profitable?

How much is too much?

At what point would I have too much of my money invested in one company's stock? -- R.N., Murfreesboro, Tenn.

First, make sure you're thinking in terms of total value, not number of shares. You might have 1,000 shares of one stock, worth $7,000, and 200 shares of another stock, worth $18,000. Don't think that 1,000 shares are too much or that 200 are too few. Focus on the percentage of your portfolio that each stock represents.

If one of your holdings represents 50 percent of your entire portfolio, for example, that's probably too much risk for most people. If anything happens to that one holding, your portfolio will take a huge hit. If you hold scores of stocks, though, and your biggest holding amounts to just 2 percent of your portfolio, that's not ideal, either. If that stock doubles or triples, its overall effect will be small.

For most people, eight to 15 stocks is a good number of holdings to shoot for. Park your money in only your best ideas. You want some diversification, but you needn't overdo it. You don't want to own more firms than you can easily keep up with. You'll need to read their quarterly and annual reports, for example, and to regularly assess whether they're still on track.

Beware of the 'hot tip'

Back in 1998 I bought the penny stock of Wordcraft Systems, a firm developing faxing software. I bought 10,000 shares at 34 cents each for $3,400. I had visions of the stock hitting $50, making me a cool half a million dollars richer. Alas, I didn't do my homework, and when it reached 50 cents per share, instead of selling it I just held on. The shares are pretty much worthless today. This was a "hot tip" I got from my now-ex-wife's boss. He bought some shares too -- I wonder how he did? -- Todd Donner, Hutchinson, Kan.

The Fool Responds: Always be skeptical of hot stock tips. The tipsters often know little about their recommendations.

Many newsletters, such as ours at www.fool.com, will give you much more information about recommended companies.

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