Archive for Sunday, September 18, 2005

The Motley Fool

September 18, 2005


Name that company

I trace my history back to 1894 and the Lancaster Caramel Co. In 1903, I began building the world's largest chocolate plant, to mass-produce milk chocolate. Today I sell more than $4 billion of goods annually. My brands include Almond Joy, Jolly Rancher, Kit Kat, Milk Duds, Rolo, Heath Bar, Bubble Yum, Ice Breakers, Reese's, Sweet Escapes, Twizzlers, Whoppers, York, Mauna Loa and SmartZone bars. With no children of his own, in 1909 my founder built a school for children whose family lives have been disrupted. Today more than a thousand kids learn on its 10,000-acre campus. Who am I?

Last week's question and answer

I'm the world's leading producer of primary aluminum, fabricated aluminum and alumina, serving, among others, the aerospace, automotive, packaging, building and construction, commercial transportation, and industrial markets. (Almost 70 percent of all the aluminum ever produced is still in use.) I also make and market Reynolds Wrap and Baco wraps, and am involved in vinyl siding, closures, fastening systems, precision castings, and electrical distribution systems for cars and trucks. There are more than 131,000 people on my payroll, and I rake in more than $23 billion annually. Who am I? (Answer: Alcoa)

A well-stocked life

Charles Schwab has been my smartest investment. In the early 1980s, I sought a broker hesitantly because brokers generally charged an arm and a leg and really didn't like dealing with little people. But Charles Schwab was an up-and-coming brokerage that wanted little people and didn't charge much. I decided to buy some of its stock. Bank of America owned it, so I bought Bank of America shares. When Schwab regained its independence, I bought more shares. Then, because I still didn't know much about what I was doing in the market, I let my Schwab stock just sit there, reinvesting the dividends. I have sold some whenever I wanted some money for other things, but I never sold completely. This year some shares will be paying for a Disney vacation. A couple of years back, they were my road to a new car and part of the down payment on a house. - Dorothy Miller, Pittsburg, Calif.

The Fool Responds: You've done well indeed. The shares of Schwab, a 2002 Motley Fool Stock Advisor pick (, have advanced more than 60-fold in the past 15 years, not including dividends.

HP gets stuck in the margins

Technology giant Hewlett-Packard (NYSE: HPQ) recently reported a robust third quarter, with revenues up 10 percent over year-ago levels, and net income up 46 percent (if you ignore a one-time $988 million "tax adjustment" to repatriate $14.5 billion in cash from foreign earnings).

A year ago, then-CEO Carly Fiorina was bemoaning the "unacceptable execution in Enterprise Storage and Servers," which had lost the company $211 million. This quarter's $150 million profit in the same unit (a $361 million swing) accounts for 87 percent of the total company improvement in operating profits. The other division where profits came to life was Personal Systems. This unit, which includes personal computers, saw its operating profits increase almost sixfold, to $163 million. In both divisions, though, operating profit margins were slim.

HP's core profit contributor, its printer division, saw revenue rise just 5 percent, while operating profits fell by 7.8 percent. Still, this division's 13 percent operating margin marks the highest among the company's four operating groups.

The good news is that overall, profit margins are inching up. But when compared with the trailing annual operating margins at many competitors, HP's numbers still look weak. One encouraging factor is that new printer technology could give the printer division a competitive advantage to start growing profits and margins again.

Be quite contrary

Too often, we hear what someone else is doing with his money, and we do the same. Following the herd in investing isn't always sensible. You might make more money by being contrary.

Consider the old saying, "Buy low, sell high." This is the ideal scenario for many people, but it's not the only possibility. You might also buy high and sell higher. After all, some high-quality companies rarely sell for what would be considered a low price. Of course, if you're patient, you may find some great companies occasionally on sale.

Another twist would be "Buy low, sell ... never (or at least not for a very long time)." Too often, investors sell out of a stock too soon. If your shares of Buzzy's Broccoli Beer (ticker: BRRRP) are up 50 percent, it can be tempting to sell and take your gain. But consider holding on. As long as the company is still firing on all cylinders, 10 years from now, the shares might be up 200 percent or more. (You can also compromise with yourself, selling just some of your position and hanging on to the rest.)

Don't be afraid of being contrary in other ways, as well. If many investors seem to be turning away from a company, it could be an ideal time to consider buying shares. Many great companies fall on temporarily tough times. Just be sure to research the company thoroughly and determine that its problems are not long-term.

Another thing that many investors do is find places for all their stock dollars. This can work out fine, but sometimes it's best to keep a chunk of your money on the sidelines, waiting for a great opportunity. Super investor Warren Buffett, for example, talks about waiting for "fat pitches" to swing at. If you can't find enough extremely promising stocks, why park your hard-earned dollars in companies that don't inspire as much confidence?

You needn't follow any herd or any dictum to succeed in investing. Take the time to learn and think for yourself.

Mock that portfolio

What's a mock portfolio? - T.C., Peoria, Ill.

Mock portfolios are terrific for new investors and those who want to test investing methods. You simply go through the motions of investing, stopping short of actually plunking down your hard-earned cash. Research companies that interest you, decide which ones you'd buy, and then set up a pretend portfolio, either on paper or online. (Many Web sites let you set up online portfolios. Try or Record details such as when you "bought" the shares and at what price. Then track your performance and see how you do. (Aim to beat the market.)

What's a "pure play" company? - G.H., Hickory, N.C.

Unlike conglomerates, a pure play is a company that has a single business focus. When investors are drawn to a particular industry, they may look for a company that's a pure play, so that their invested dollars won't be spread out over other, less desirable businesses.

If your research suggests that the light bulb industry is one of the most attractive and profitable ones around and you want to invest in it, you might invest in General Electric, which makes everything from light bulbs to airplane engines. Or you might try to find a pure play light bulb company. The hypothetical Bright Idea Light Bulb Co. (ticker: UREKA) might fit the bill. Money invested in GE would cover many different operations with varying profitability characteristics, while funds in UREKA would be focused solely on light bulbs.

Coca-Cola is a beverage pure play, unlike PepsiCo, which has a giant snack operation in Frito-Lay. Reynolds American is a tobacco pure play, while Altria owns all or part of Philip Morris, Kraft Foods and beer-maker SABMiller.


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