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Archive for Sunday, December 18, 2005

The Motley Fool

December 18, 2005

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Name that company

Based in El Paso, Texas, I'm a leading designer, producer and global marketer of items such as hair dryers, curling irons, women's shavers, hair accessories, mirrors, foot baths, body massagers, hairstyling products, body powder, skin care products, and tools for kitchens, cleaning, barbecue, barware, storage, organization, garden, trash and cars. My brands include OXO, Good Grips, Brut, Vitalis, Final Net, Ammens, Condition 3-in-1, Skin Milk, TimeBlock, Epil-Stop, Dazey, Caruso, Karina, DCNL, Nandi, Isobel, WaveRage, Hot Spa and Wigo. I rake in more than half a billion dollars annually. Some say I launched a thousand ships. Who am I?

Last week's question and answer

Based in Hartford, I'm a diversified company that provides high technology products and services to the aerospace and commercial building industries worldwide. My businesses include Otis Elevator, Carrier heating and cooling, UTC Fire & Security, UTC Power, Pratt & Whitney aircraft engines, Hamilton Sundstrand aerospace systems, and Sikorsky helicopters. I employ 210,000 people, 143,000 outside the U.S., and am America's 22nd-largest manufacturer. I've been paying dividends on my stock since 1936, and I rake in more than $35 billion annually, more than $5 billion from the U.S. government. Who am I? (Answer: United Technologies)

Shrinking fund

In 2000 I rolled $10,000 in my IRA from a certificate of deposit into the Reynolds Blue Chip fund. I thought the fund would grow in value, and I would have a little money to live on when I needed it. I turned 80 years old this year and needed the cash. I received $3,363. - A reader, anonymously

The Fool Responds: Ouch. The Reynolds Blue Chip Growth fund has had a volatile past. In 1995 to 1999, it gained 33 percent, 28 percent, 31 percent, 54 percent and 51 percent, respectively. That's downright amazing. But from 2000 to 2002, it lost, respectively, 32 percent, 29 percent and 37 percent before gaining 42 percent in 2003 and losing 1.43 percent in 2004. If you don't enjoy roller coaster rides, this fund isn't for you. Making matters worse, its expense ratio, an annual fee, is above average, at 1.8 percent. That knocks nearly 2 percentage points off the fund's return.

When looking for a good mutual fund, you need to examine the long-term track record and fees, among other things. Get tips on funds at www.fool.com/mutualfunds/mutualfunds.htm.

Wal-Mart's been kicked

Is all the negative press that Wal-Mart (NYSE: WMT) has been receiving lately creating a buying opportunity? Look at a five-year chart comparing its stock performance with Target (NYSE: TGT) and Motley Fool Stock Advisor (www.fooladvisor.com) pick Costco (Nasdaq: COST). Target has nearly doubled, Wal-Mart is nursing a loss, and Costco falls in between. So on a peer basis, the stock is definitely lagging.

Still, the firm has been performing well. Sales for the completed fiscal year ended January 2001 were $181 billion. They rose to $285 billion for fiscal year 2005. Net income went from $6.2 billion to $10.3 billion.

Analysts expect Wal-Mart to increase earnings 14 percent annually for the next five years. When you compare Wal-Mart to Target and Costco on a PEG ratio basis - which compares the stock's price (in terms of its price-earnings ratio) to its growth rate - Wal-Mart and Target both post 1.2, which looks like a bargain compared to 1.7 for Costco. With reasonable growth prospects still ahead, the stock is priced in line with at least one top-tier peer and well below another.

Wal-Mart seems to have paid a price on Wall Street for all the bad publicity. In the future, the stock should be able to grow its stock price in line with its peers. If it doesn't, at some point the stock will become an overwhelmingly compelling value investment.

ABCs of ETFs

Consider adding exchange-traded funds (ETFs) to your portfolio. More than $250 billion is already invested in them (which still pales next to the trillions in mutual funds).

Think of ETFs as mutual funds that trade like stocks. Many are index-based. By investing in one, you're simply putting your confidence in the companies in that index. Here are nicknames and ticker symbols for some ETFs of major indexes: S&P 500 (Spiders, SPY), the Nasdaq 100 (Cubes, QQQ), Total Stock Market (Vipers, VTI), Dow Jones Industrials (Diamonds, DIA), Russell 2000 (iShares Russell 2000, IWM), MCSI Japan Index (WEBS Japan, EWJ).

With very low fees and tax-efficient infrequent trading, ETFs provide diversification among groupings of large businesses. They're also among the least time-consuming of all investing strategies. If you want to manage some or all of your money passively (not cherry-picking individual stocks), ETFs provide significant advantages.

ETFs can be shorted, optioned and margined. This can be not such a good thing. ETFs are almost too easy, and as a result, they have been used extensively as short-term investments, the complete antithesis of index investing. John Bogle, the father of index investing, likened ETFs to a shotgun in a recent speech, 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. (Trading in and out of any stocks rapidly also can hurt your performance.)

There's another group of investors for whom ETFs would not be appropriate: those who dollar-cost average, investing small sums systematically to build up a portfolio. Since there are no direct investing plans for ETFs, dollar-cost averaging could rack up significant trading costs. These investors would do better with a no-load, low-expense index mutual fund, or by dollar-cost averaging into individual companies.

Before buying any ETF, read up on it to understand exactly what its holdings and fees are.

There's more to learn about these interesting beasts. For more on ETFs, head to www.fool.com/etf/etf.htm or www.morningstar.com/Cover/ETF.html.

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