Last week’s question and answer

Don’t let my ticker symbol burn you. I’m one of the world’s largest hotel companies, with names such as Sheraton, St. Regis, The Luxury Collection, Westin, Four Points and W. I own, lease, manage or franchise more than 700 properties with more than 230,000 rooms in more than 80 nations. I also develop, own and operate vacation ownership resorts, marketing and selling ownership interests to customers, along with providing financing. My Westin Heavenly Bed will be sold through Nordstrom soon. I plan to open some 70 hotels in the next two years, and I employ 120,000 people. Who am I?

(Answer: Starwood Hotels and Resorts)

Splitting shares

Do you get excited over stock splits? Don’t – because they’re largely meaningless.

Imagine shares of Cheese Sciences Inc. (ticker: CURDS), trading around $40 each. If you own 100 shares, they’re worth about $4,000. If CURDS splits its stock 2-for-1, for each share you own you get another. With 200 shares, are you now a lot richer? Nope. While the number of your shares increases, the value of each share decreases proportionately. After the split, the shares will trade around $20 each. The total value of your shares? Still $4,000.

Splits can take many forms: 2-for-1, 3-for-2, etc. There are even “reverse splits,” which reduce the total number of shares and plump up the price. But beware – companies often use them to give the (false) impression of higher value. Remember, splits don’t affect the value of a business. They don’t change how much money a company makes.

One reason companies split their shares is to keep prices low enough for individual investors. If, in its 86-year history as a public company, Coca-Cola had never once split its stock, one share would be currently priced at more than $200,000. Few folks today could afford a single share. In fact, Coke has split so often in its history that if you’d bought just one share when it went public in 1919, you’d have more than 4,600 shares today. It’s rare for investors to be shut out of a stock because of a steep price, though. Even with a $500 stock, shallow-pocketed investors can just buy one or two shares.

While a split can make a stock’s price more psychologically inviting, it doesn’t make it a sudden bargain. A stock selling at more than $100 per share might seem “expensive,” but it can be a much better value than many $20 stocks. Stock prices matter only when you compare them to other numbers, such as earnings.

Focus on companies’ true value, not their stock price. Try our “Inside Value” newsletter for free, and see which stocks we think are undervalued at www.insidevalue.fool.com. Or read “Value Investing for Dummies” by Peter J. Sander and Janet Haley (Dummies, $22).

The rule of 72

What’s the “rule of 72”? – P.W., Sacramento

It’s a tiny bit of math that can help you think about investing. The rule offers a quick way to figure out how long it would take for an investment to double in value at a given growth or interest rate. For example, imagine that you have some money to invest and are deliberating between plunking it in stocks (expected average annual return: 10 percent), CDs (5 percent) or a savings account (2 percent).

Take 72 and divide it by 10, and you’ll get 7.2. That means it should take about 7.2 years for your money to double, growing at 10 percent. Divide 72 by 5, and you’ll see that it’ll take about 14.4 years to double your money at that rate. Growing at 2 percent, doubling will take about 36 years. The rule can be reversed, too. If you know that your money doubled in four years, for example, you can divide 72 by 4 and you’ll see that you earned roughly 18 percent per year.

The rule of 72 doesn’t work, though, when you’re dealing with extreme numbers. Divide 72 by a 72 percent return, for example, and you’ll see that you can expect to double your money in one year. But that would actually take a 100 percent return, not 72 percent. In addition, it’s more accurate when dealing with somewhat higher returns to use 76, not 72.

McLeod burst

My stock club is doing pretty well now, but we’ve definitely committed some errors. Buying McLeod soon after it went public wasn’t dumb; the stock doubled and then tripled in value. But holding on to it as it plummeted until we finally sold at around 30 cents per share – that was dumb. (We’d bought at about $17 per share.) We did the same thing with Engineering Animation. We even bought more shares as it began to drop, thinking that it had such good products that it would come back up. We rode that horse all the way down ’til it died at the bottom of a ravine. – Kris, Iowa City, Iowa

The Fool Responds: You’re smart to belong to an investment club – they can help investors of all stripes perform better (learn more at www.better-investing.org and www.fool.com/InvestmentClub). At least you sold your McLeod shares for 30 cents – they fell even lower later. Ask yourself how much your club really knew about the company before you bought it. Many fallen stocks recover nicely, but hang on only if you’re informed and confident.

Dell-icious

Global personal computer king Dell (Nasdaq: DELL) continues to knock the socks off investors, recently reporting another fantastic quarter.

Revenue increased 16 percent compared with last year’s first quarter, helped significantly by a 21 percent increase in sales outside the U.S. (which are now 42 percent of total sales). Net income shot up 28 percent to $934 million.

Dell’s first-quarter desktop PC sales (40 percent of total sales) were up 6 percent, while notebook sales (24 percent of sales) surged 22 percent. Sales of high-profit-margin printer ink, toner and supplies nearly doubled. Total worldwide software and peripheral sales (also high-margin, including imaging and printing, TVs and displays) increased 29 percent from the year-ago quarter. Operating profit margins increased 0.4 percent to 8.8 percent. Even better, cash and short-term investments increased from $5.3 billion (at the same time last year) to $9.8 billion.

Dell is a golden goose. But despite having only $504 million in debt and a booming business, this Motley Fool Stock Advisor recommendation has seen its stock rise only about 6 percent during the last year.

With analysts expecting earnings to rise 24 percent this year and 17.5 percent next year, the current stock price is attractive for a company that has proved, over the long term, that it can enter markets and profitably dominate them.