Last week’s question and answer

Based in the Netherlands and founded in 1891, I’m the world’s biggest maker of lightbulbs, electric shavers and DVD players. I’m also Europe’s largest electronics company, with annual revenues nearing 30 billion euros. I offer such wares as color television sets, lighting, computer monitors, semiconductors, medical diagnostic imagers and one-chip TV products. I employ more than 160,000 people in more than 60 nations. My brand names include Sonicare, Senseo and Norelco. I light 30 percent of offices and hospitals around the world. I hold more than 100,000 patent rights. Who am I?

(Answer: Royal Philips Electronics)

When to panic

Many investors tend to panic when a stock they own, or the whole market, heads south. They get anxious, wondering whether they should follow the crowd and bail out. Following the crowd often is the worst thing to do, though. When the market tanks is often a good time to buy, not sell. As Warren Buffett has quipped, “Be greedy when others are fearful, but be very fearful when others are greedy.”

So when should you rightfully panic? Here are some possibilities:

• When you don’t know why you own the stocks you own. If you have no clue why you ever bought shares of Cheese Sciences Inc. (ticker: CURDS), you’ll have trouble determining when it’s the right time to sell. If CURDS shares just took a nosedive, it might be due to some fleeting market misunderstanding, in which case you should hang on. Or it might be due to some serious trouble at the firm. An informed investor should have a good handle on her investments.
• When you don’t understand the long-term upward trend of the market. From decade to decade, stocks in great companies and the market as a whole both tend to rise in value. To keep your blood pressure down during market slumps, remind yourself of this.
• When you have a short time horizon. If your moolah is invested in stocks for just a few months, then go ahead and begin hyperventilating right now. Anything can happen in the short term. Even stock in wonderful companies can temporarily free-fall. Any money you expect to need within the next five (if not 10 or more) years should be out of stocks and perhaps in CDs or money market funds. Learn more at www.fool.com/savings and www.bankrate.com.
• When you haven’t learned that it’s the percentage of the market drop that counts, not the points. A 100-point drop was a big deal when the Dow was at 1,000. But when it’s at 10,000, 100 points is just 1 percent.

Look beyond 52 weeks

Does it make sense to look for stocks whose share prices are trading near their 52-week lows and to consider selling ones trading near their highs? — L.V., Escondido, Calif.

The price alone doesn’t offer enough information. A company whose stock is trading near its all-year low might be temporarily facing some trouble, in which case it could be well worth your while to research it further and possibly invest in it. Alternatively, it might be careening to its demise, about to burst into flames.

Selling a stock at its all-year high can be a bad idea, too. Think of wonderful companies that have been good to shareholders for many years. They set new highs all the time, despite occasional bumps in the road. Sell now, and you might miss out on future gains.

Succeed by focusing on what a stock is really worth. Buy when it’s significantly underpriced and sell when it’s overpriced. Newsletters at www.fool.com/shop and www .morningstar.com can offer estimates of stocks’ fair values.

How does stock get diluted? — H.B., Norwich, Conn.

Stock dilution happens when a company issues additional shares, decreasing the value of existing ones. Imagine that you own one of a pizza’s eight slices. If it’s cut into 10 pieces instead, you’ll own a tenth instead of an eighth. Your ownership share has shrunk.

It’s not necessarily bad when a company issues additional shares. Sometimes shares are issued to raise money that’s used to generate additional sales and earnings. If so, then economic dilution might not occur.

If new shares are issued to finance value-destroying projects, though, watch out. This can happen if shares are used to finance a merger that fails to meet expectations or to overpay an underwhelming CEO.

Should RPM get you revving?

The company behind the Rust-Oleum, Bondo and DAP brands, RPM International (NYSE: RPM), has been having a tough time lately. Not only are ongoing asbestos issues chewing up time and resources, but rising raw material costs are pinching results as well.

Overall sales growth at RPM International in the third quarter was tepid — up 8.9 percent. While the industrial business was a bit stronger (up 10.7 percent), the consumer segment’s growth was only 6.7 percent. The main problem, though, is on the expense side. Operating margins dropped to 3 percent for the quarter — down from 3.6 percent a year ago. That’s a big deal in a low-margin business.

RPM International might be a company worth watching as a turnaround candidate. If you strip out the asbestos costs, business hasn’t been too terrible during the past few quarters, and cost-recovery efforts are paying off.

Turning to the asbestos matter, it’s easy to get scared. After all, the number of active cases continues to grow rapidly, and the company has had to set aside nearly $100 million in liability reserves. Nevertheless, RPM International has had a pretty good record in adjudicating these claims.

The dividend yield is north of 3 percent, and there is positive free cash flow. With strong brands in both the consumer and industrial markets, value-oriented investors might want to keep an eye on RPM International.

Only a dollar

In May 1998, I bought shares in a Canadian company called Hyal Pharmaceutical. I didn’t know much about it and knew nada about the management. In the previous year or so, its price had fallen from about $12 to $1 per share, due to poor clinical trials of one of its products. However, it had another product that had been approved in several European countries as well as Canada. I figured, “Hey! It’s only a buck — it’ll come back!” So I bought 1,000 shares. However, I was basing my future returns on the success of only one product — not smart when investing in pharmaceutical companies. The stock kept sinking, as the drug faced multiple approval challenges. I bought more. Eventually, the firm was sold, with shareholders getting nothing. — R.S., San Francisco

The Fool Responds: When stocks plunge in value, it’s often for a good reason. As you learned, it’s risky when a firm is relying too much on one product (or one main customer, for that matter). Beware of “penny stocks” — those trading for less than about $5 per share.