Name that company

I’m the No. 1 pharmacy benefit manager, running the nation’s largest mail-order pharmacy. A Fortune 500 company with 2004 revenues of $35 billion, I serve about one in four Americans via mail order or through nearly 60,000 retail pharmacies. I was spun off from Merck in 2003. I’m one of Fortune magazine’s “Most Admired Companies.” I recently bought Accredo Health for $2.3 billion, making me the nation’s largest specialty/biotech pharmacy operation. I’ll now better serve the needs of patients with complex conditions requiring advanced treatment – increasingly with a growing variety of costly biotech medications. Who am I?

Last week’s question and answer

The largest oil refiner in North America, I’m a Fortune 500 company based in San Antonio, Texas, with approximately 22,000 employees and assets valued at $31.5 billion. I sport 9,150 miles of pipeline, 94 terminal facilities and four crude oil storage facilities. I also have approximately 4,700 retail sites branded with my own name or one of the following names: Diamond Shamrock, Ultramar, Beacon and Total. I take in about $70 billion annually and can refine 3.3 million barrels per day. I offer conventional gasoline, jet fuel, kerosene, home heating oil, asphalt, propane, sulfur and more. Who am I?

Answer: Valero Energy

Don’t cry, Kimberly-Clark

Kimberly-Clark (NYSE: KMB), the maker of Kleenex and Huggies, has seen its shares plunge to the canyon floor, falling 17 percent from their 52-week high. Can it rise again? Inflated costs of raw materials such as fiber and oil-based resins may likely batter the company’s share price even further. Furthermore, higher energy prices likely will take their toll on production and distribution costs. But Kimberly Clark won’t just roll over and play dead.

The company plans to boost research and development spending 50 percent by 2009 to identify potential growth opportunities. In addition, it has entered new markets with products such as anti-viral facial tissues and recently announced potty-training resources. It also has enjoyed great success internationally, with consumer tissue sales alone increasing 18 percent last quarter.

Financially, Kimberly-Clark is sound. Free cash flow has nearly doubled since 2002. The company has rewarded shareholders with stock repurchases of $1.5 billion in 2005 and a dividend yield topping 3 percent. It also has roughly half a billion dollars in cash on the balance sheet.

With resin, pulp, oil and natural gas among its key raw materials, the company’s feathers could get plucked a few more times. But with the stock trading near a historically low price-to-earnings (P/E) ratio of 15, long-term investors may want to swoop in for the kill. A long-term buy-and-hold strategy may just have investors wiping away tears of joy in a few years.

Fund facts

One of our heroes at Fool HQ is John Bogle, founder of the Vanguard Group and father of the index fund (which we’ve long recommended for most investors). In the Financial Analysts Journal, Bogle shared some thoughts on how the mutual fund industry has changed during the past 60 years.

Here are some eye-opening statistics he shared:

¢ There were just 68 or so funds 60 years ago, compared with more than 8,000 today. That’s roughly the equivalent of one fund per stock that exists.

¢ Speculation has become rampant. Managers of yore would hold on to stocks for years, while these days it’s often months. “Indeed, between 1945 and 1965, annual portfolio turnover averaged a steady 17 percent, suggesting that the average fund held its average stock for about six years. … Fund managers now turn their portfolios over at an average rate of 110 percent annually.”

¢ In 1945, shareholders tended to hold on for a long time – typically around 16 years. Today, a typical holding period is more like three or four years.

¢ Fund costs have increased. The average expense ratio (an annual fee) for the largest funds in 1945 was 0.76 percent; it’s now 1.56 percent. Bogle notes: “In other words, while their assets were rising 3,600-fold, costs were rising 6,600-fold.”

¢ Between 1983 and 2003, the stock market’s average annual return was 13 percent, while the average stock mutual fund’s return was just 10.3 percent.

So what should you do? Consider forgoing managed mutual funds and sticking with simple index funds that track indexes such as the S&P 500 or the total stock market. Their fees tend to be considerably lower, and they have, for many decades, outperformed the majority of managed equity funds. Index funds let you closely match the stock market’s average return.

If you want to do better, identify the relatively few funds with long, outstanding track records and promising futures.

Study up at www.morningstar.com, and take advantage of a free trial of our Motley Fool Champion Funds newsletter, at www.championfunds.fool.com. It even features an interview with John Bogle.

The wrong moves

My first foray into investing was a stock tip from a friend. I studied the charts, saw a pattern of up and down, and decided I could double my money in two weeks, which I did. Emboldened, I looked around for my next ticker to easy money. I found my next hot tip – WorldCom – in a magazine and jumped right in, borrowing money on margin from my brokerage and even using one of those demonic credit-card cash-advance checks. Man, this investing stuff is easy. Month after month I held, watching my portfolio shrink and debts grow. I’ve finally paid off all that debt and am cautiously testing the stock market waters again, but now with the benefit of hard-earned experience. This time I’ve taken out a second mortgage on my house to short the builders for $40,000 based on a great tip from AM radio. Just kidding. – S.B., Boulder, Colo.

The Fool Responds: Hot tips, studying charts and patterns, credit card advances, borrowing on margin – ay, caramba. You packed a lot of painful lessons into a short period, but you should fare better from now on.

Taking stock

I have only $5,000 to invest, so I’m looking for stocks under $5. Where should I look? – C.Y., Gary, Ind.

First off, you’re wrong to think that you need to find “cheap” stocks. You may buy 1,000 shares of stock for $1 each, only to see them fall in value, while you alternatively might have bought 100 shares of a $50 stock that doubles in a few years. The price alone doesn’t tell you much. A $300 stock might look pricey, but if the company’s shares are really worth $500 each, it’s a bargain.

Consider steering clear of “penny stocks,” those trading for less than $5 each. Often volatile and extra-risky, they may be more likely to fail than flourish. Too many people fall for them, getting excited at the thought of owning thousands of shares and not realizing that many 50-cent stocks become 10-cent ones.

When I purchase a share of stock in a company, what am I buying? I see that the company gets its money when the stock is issued, but after that, what does the company get out of it when I buy a share on the open market? – B.F., Bradenton, Fla.

A share of stock represents a (small) chunk of a real company. If a firm has a million shares outstanding and you buy 100 of them, you own one ten-thousandth of the company. The company does get its money at the one-time issuance of the share, but as shares fluctuate in the open market, companies do care how they fare. A falling stock can make it easier for the firm to get bought out. A rising stock can help insiders with stock or stock options get richer.