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THE MOTLEY FOOL
Ask the Fool
Published: March 21, 2023
Q. Is a company with a $75 stock price bigger and financially healthier than one with a $25 stock price? -- S.K., Midland, Michigan
A. Not necessarily. A stock price alone doesn't tell you very much. You need more information, such as how many shares there are: If the first company has just 1 million shares, its value would be $75 million, while if the second company has 1 billion shares, it would be valued at $25 billion. Another useful measure might be how much income the company has been earning per share.
To get a sense of a company's financial health, check its financial statements, such as its balance sheet and income statement. You can see, for example, how much cash and debt it has and how quickly its revenue and earnings are growing.
A company with slowing sales and rising debt is not likely to be attractive at any price. Instead, a promising investment would be growing briskly, widening its profit margins and gaining market share -- all while seeming to be undervalued by other investors. That's true no matter what its share price.
Remember: A $2 stock can really be "worth" only $0.10 per share, while a $500 stock might be worth $1,000 -- and be headed there, too.
Q. What's an "orphan drug"? -- A.H., Greenville, North Carolina
A. It's a drug developed to treat a rare disease or condition -- one that affects fewer than 200,000 people in the United States.
As you might imagine, pharmaceutical companies are unlikely to pursue treatments for such conditions without millions of customers helping them recoup their development costs. That's why the Orphan Drug Act of 1983 was passed, to provide them financial incentives to do so.
Fool's School
Consider a Trust
You may associate the term "trusts" with wealthy people, and it's true that many upper-income folks include one or more trusts in their estate plans. But people in the middle class may benefit from using trusts, too.
A trust is a legal document that can make sure your financial assets are passed on to your beneficiaries according to your wishes -- during your lifetime or afterward. The beneficiaries might include your spouse, children, other family members, charities or pets. The financial assets in the trust are managed either by you or by one or more trustees, which can be trusted people or organizations.
With a trust, you can specify that assets go to named beneficiaries at certain times, such as upon your death or when a child reaches a specific age (say, 30). It can help you distribute the rest of your property, too. And while a traditional will can do that, wills take effect only after you die. A trust can establish arrangements if you're temporarily or permanently disabled and unable to manage your assets.
Trusts can help you and your beneficiaries postpone or avoid some taxes, and assets that are passed on through a trust are often excluded from the probate process. That can make transfers of assets faster and less costly and can keep your arrangements more private.
There are many kinds of trusts, but they're typically either revocable or irrevocable. A revocable trust, also known as a living trust, is one that you can change or cancel (revoke) until you die. An irrevocable one is generally permanent -- but can offer more tax advantages.
Trusts tend to be more complicated than wills, and often cost more to create. If you're considering a trust, read more about them, perhaps in "The Complete Book of Wills, Estates & Trusts (4th Edition): Advice That Can Save You Thousands of Dollars in Legal Fees and Taxes" by Alexander A. Bove Jr. and Melissa Langa (St. Martins Griffin, $20). And consider consulting a professional, such as an estate lawyer.
My Dumbest Investment
iClick-ed
My worst investment move was buying shares of iClick Interactive Asia Group. I read a small story suggesting it was working with Facebook. That sounded good. I bought my shares for a little less than $18 apiece -- but I think the company's stock is now less than $0.60 per share! -- J.C.S., online
The Fool responds: Shares of iClick were recently trading near $3.60 apiece -- but that's largely due to a 1:10 reverse split that occurred in November 2022. Regular splits feature a larger number followed by a smaller one: A 3:1 split, for example, will give you three shares for each share you own, while reducing the share price proportionately, so that the total value of your holding is just about the same. A 1:10 reverse split, though, leaves you with one share for every 10 you own, while boosting the share price tenfold and leaving the overall value of your holding intact. Companies often execute reverse splits to prop up their share prices, to avoid being delisted from a stock exchange due to an alarmingly low stock price.
iClick's history includes other red flags, such as a secondary offering of additional shares of stock in 2020 that diluted the value of existing shares. In addition, it's a Chinese company; international stocks are subject to political and currency headwinds, among other risks, and often have fewer regulatory requirements than U.S. stocks.
Foolish Trivia
Name That Company
I trace my roots back to 1851, when my founder invested in the Bay State Glass company of Massachusetts; he then moved to Brooklyn, New York. In 1868, he moved his entire glass company via barge on the Erie Canal system to its new home. I made the first glass bulbs for Thomas Edison's electric lights, the first low-loss optical fiber and Gorilla Glass, the first damage-resistant cover glass for mobile devices. Today, with a market value near $30 billion, I'm a leader in glass science, ceramic science and optical physics. Another of my best-known products is Pyrex. Who am I?
Last Week's Trivia Answer
I trace my roots back to 1935, when an adventurous couple in Seattle started importing Austrian ice axes. They soon formed a 23-person co-op, each paying $1 for a lifetime membership, and started selling items in a local grocery store. Today, I'm a major retailer of outdoor gear -- and the largest consumer co-op in America. I boast more than 21 million members and more than 180 locations in 42 states and the District of Columbia. I spend a big chunk of my profits on dividends for members, benefits for employees and investments in outdoor-focused nonprofits. Who am I? (Answer: REI)
The Motley Fool Take
Huge and Getting Huger
Tech giant Microsoft (Nasdaq: MSFT) did not escape last year's tech stock sell-off; its shares were recently 20% below their 52-week high. There's plenty of reason to expect the stock to recover and increase in value over the long run.
For starters, it's diverse, with divisions covering software and hardware as well as business and consumer products and services, but no single category makes up more than 50% of its business. Microsoft's largest division, server products and cloud services, is also growing the fastest -- its revenue was up 20% year over year in the quarter ending in December. That division contains Microsoft's Azure cloud infrastructure and platform services, which grew by 31%.
Microsoft groups its businesses into three large categories: productivity and business processes, intelligent cloud and more personal computing. Even during the second quarter's down cycle in consumer and PC sales, Microsoft had profits in all three categories.
Microsoft's varied profit streams make it an incredibly resilient business. Diversified, rising profits also allow Microsoft to invest in new and exciting innovations such as ChatGPT parent OpenAI, all while returning cash to shareholders via dividends and share repurchases. (The Motley Fool owns shares of and has recommended Microsoft.)
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