Ask the Fool: Low or high-priced stock?
A $20 stock may be overvalued and likely to fall, while a $300 stock may be a great bargain.
Q: As a new investor, I wonder: Is it better to buy stocks under $20 per share, like Fitbit, or higher-priced stocks such as Sherwin-Williams (recently near $680 per share), that have been around longer and have good track records? It seems you could buy a lot more shares in lower-priced stocks and make more money. – John S., online
A: You need to separate the price of the stock from the rest of your thinking. The price doesn't matter all that much – unless it's below around $5 per share, in which case you're probably looking at a risky "penny stock." Understand that huge, old companies can have low share prices: Wells Fargo stock was recently near $25. Younger companies can have high share prices: Amazon.com shares were recently near $3,300 apiece.
Furthermore, a $20 stock may be grossly overvalued and likely to fall, while a $300 stock may be a great bargain, destined to hit $900 in a few years and $2,000 after that. Focus on each company's fundamentals; study it to determine if it's healthy and growing, and if it's trading at a reasonable, or even low, price. Don't worry about the number of shares you buy, either – you can double or triple a $1,000 investment whether you buy a single $1,000 share or 100 $10 shares.
Q: What's a 529 plan? -- B.H., Orem, Utah
A: It's a tax-advantaged, usually state-based account you can set up to save for educational expenses such as college. You don't have to use your own state's plan, either – you can research other states' offerings and choose the best plan for you. Learn more at SavingforCollege.com and CollegeSavings.org.
What's your investing strategy?
For best results when investing, don't just buy or sell whatever you fancy on a whim, following hot tips, hunches, media mentions or your emotions. Instead, read up on investing, consider your situation, develop a strategy and then stick to it.
Begin by learning about various investments so that you understand their risks and possible returns. (The "Investing Basics" drop-down menu at Fool.com is a good place to start.) For example, stocks tend to be more volatile than bonds, but they outperform bonds handily over long periods. And you shouldn't expect more than an average annual growth rate of 8% to 10% in stocks over the long term, though higher (or lower) rates are possible over shorter periods. Read up on great investors, too, and learn about different investing styles, such as growth investing and value investing.
Think about these questions as you mull how you want to invest:
- What's your investing time frame? When you buy stocks, you should only invest money you won't need for five years or more.
- How involved will you be? If you're going to learn to study stocks and then follow your holdings regularly, great. If not, consider simple, low-fee, broad-market index funds, such as those that track the S&P 500 or the entire stock market.
- How risk-tolerant are you? Bank accounts and certificates of deposit (CDs) are low-risk, but they won't grow your money briskly; they may not even outpace inflation. Stocks are riskier, but some less so than others, and sticking with solid, established, dividend-paying companies can lower your risk.
- How will you invest? Will you use dollar-cost averaging, contributing a set amount regularly to one or more investments? Will you favor large blue-chip companies, or look for smaller and possibly faster-growing ones? Will you diversify across different industries and different kinds of companies? Will you look for undervalued stocks? How many stocks will you aim to own?
My Smartest Investment
My smartest investment was buying shares of cloud-based communications specialist Twilio at $25 each. The company looked like it had great people, great values and great innovative services. – T.C.S., online
The Fool responds: A combination of great people, values and innovations – that's a terrific start to finding a solid investment. You always want sound management, and while that can be hard to evaluate, you can start by reading some of management's annual letters to shareholders to get a sense of how candid and communicative they're being. Twilio CEO Jeff Lawson has spoken at length about the company's values, and its website lists 10 of them, such as "Wear the customer's shoes" and "No shenanigans."
Innovation can help a company succeed as it responds to a changing marketplace. Innovation can even help it change the marketplace itself, such as when Apple introduced the iPod. It's exciting when you spot companies innovating at this level, but don't buy into them at any price; aim to buy them when they seem undervalued. Twilio stock, recently trading near $240 per share, has risen sharply in a few years, and bulls expect much more long-term growth. Bears see the stock as overvalued, though, and point out that the young enterprise is not yet profitable: Its revenue is growing rapidly, but it's plowing its cash into further growth. (The Motley Fool owns shares of and has recommended Twilio.)
Name that company
I trace my roots back to the 1940s, when a retired high school principal met a retired teacher living in poverty in a chicken coop. After the principal formed an organization to help retired teachers, in 1958 she founded me to address the needs of all older people. I launched a lifelong learning institute in 1963. In the 1960s, I successfully pushed for legislation banning age discrimination in the workplace. In 1979, I launched driver-safety programs for older drivers. My magazine, formerly called Modern Maturity, is read by tens of millions. You can join me even if you're younger than 50. Who am I?
Last Week's Trivia Answer
I trace my roots back to 1972, when two guys noticed a storage business that had a waiting list for customers. They invested $25,000 each and opened a storage facility in California – and agreed to keep opening more facilities until there was no more demand. Today, based in Glendale, California, I boast more than 2,500 locations, and I'm still growing. I'm the world's largest owner, operator and developer of self-storage facilities, with a market value recently near $36 billion. I serve about 1.5 million customers, with roughly 1 million moving in or out of units annually. Who am I? (Answer: Public Storage)
The Motley Fool Take
Snack on this stock
If you're looking for a resilient investment during this pandemic, consider PepsiCo (NASDAQ: PEP). It's not simply a beverage company, as many people assume; it also owns the Frito-Lay family of snacks and the Quaker Foods business. In fiscal 2019, PepsiCo generated 46% of its revenue from beverages and 54% from foods. It's also very much a global company, with 42% of revenue coming from outside the U.S. in fiscal 2019.
To grasp just how dominant PepsiCo is in the food and beverage business, check out some of its brands: Pepsi-Cola, Lay's, Doritos, Aquafina, Mountain Dew, Gatorade, Pure Leaf, Tropicana, Quaker Oats, Brisk, Smartfood, Ruffles, Cheetos, Fritos, Tostitos, Rold Gold, Funyuns, Life cereal, Cracker Jack, Rice-A-Roni, Sierra Mist, 7UP, Naked, Near East, and Walkers. Fully 23 of its brands each generate more than $1 billion in annual revenue.
PepsiCo isn't resting on its laurels. It's boosting its popular energy-drink offerings, and it's building a direct-to-consumer revenue channel via its PantryShop.com and Snacks.com websites.
PepsiCo's dividend recently yielded almost 3%, and that payout has been increased annually for 48 consecutive years. (The most recent increase was 7%.) The company's market value was recently around $190 billion, and its forward-looking price-to-earnings (P/E) ratio was recently in the mid-20s; these suggest that it's not a screaming bargain, but it's not wildly overpriced, either.
Copyright 2020 The Motley Fool
Distributed by Andrews McMeel Syndication