Ask the Fool: Profitable or unprofitable?

There's no need to completely avoid unprofitable companies; just don't put all your money in them.

Motley Fool
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Q: Is it best to invest only in profitable companies, avoiding those that are losing money? – J.C., Victoria, Texas

A: Not necessarily. Many great companies start out losing money as they establish themselves. You need to be confident that they have a path to profitability, and that they're likely to get there. In their early years, they may spend more than they earn on marketing campaigns, hiring top talent or expanding their reach in order to compete and grab market share.

Amazon is a perfect example here – even when it was very successful, it posted years of losses due to heavy spending. But it was clear that it could turn profitable just by reining in spending and hiking prices. So there's no need to completely avoid unprofitable companies; just don't put all your money in them. There are always many great profitable companies in which you can invest.

Q: How should I use stop orders? – C.M., Janesville, Wisconsin

A: You can use them to buy or sell stocks at or near specified prices. Many people place stop orders with their brokerages to avoid losing a lot of money if a holding suddenly plunges.



You might place an order to sell a stock if it falls by, say, 15% from its current price (to a certain price per share). It's tricky, though, because plenty of great long-term investments might temporarily fall by 20% or more, before eventually recovering and going on to new highs. Thus, it's best to not set your stop order too conservatively – or just to not use stops at all, at least for selling. Long-term investors hoping to stay invested in very promising stocks for years should simply expect volatility and ride out temporary downturns.

Fool's School

Scams and how to avoid them: The more you know about scams, the more you can avoid them. Here are common traits of scams to watch out for:

It's personal: Some scammers pretend to be a friend or family member who has an emergency and needs money.

Someone asks for a wire transfer: A scammer might ask you to transfer money out of the blue, perhaps through a company such as Western Union. Once you wire money, it's gone – and you probably can't get it back.

You're being enticed by money: If an email, text or phone call suggests that you can collect a lot of money by taking some trivial action, that's a red flag.

You're asked to be a go-between: Don't fall for a request to handle and transfer money between other parties.

It claims to be official: Many scammers will call, text or email you pretending to be a government entity or financial institution, in order to try to get your personal information or a payment from you. Their emails can look convincing, and their messages might be persuasive. Beware. Look up the organization, and contact it through official channels; don't click any links or call a phone number a possible scammer has given you (or give money or information to a caller).


It's urgent: If you're informed that you must act very soon, you're probably being manipulated into acting rashly, on emotion.

It plays on fear: Some scammers will try to scare you into action – suggesting, for example, that you might lose your Social Security benefits – or even your job – if you don't make a certain payment or divulge personal information.

The bottom line is that if something sounds too good to be true, it probably is. And if it seems a bit too weird, such as requesting that you make a payment before receiving a sweepstakes prize, that's also a red flag.

My smartest Investment

Down, then up: One of my dumbest investments – buying shares of Exelixis – has also been one of my smartest investments. It has been down 80% at one point (when I bought more) and then up some 300%. Know your companies. – D.D., online

The Fool responds: Biotechnology stock Exelixis dropped sharply in late 2000 as the dot-com bubble burst, sending the overall market down. Many people simply sold lots of their stocks during the market crash – which is what kept stock prices falling. But at such a time, it's smart to ask yourself about any holding that has fallen: Has it actually become a less promising proposition, or is it simply facing a temporary setback? Big market crashes take down great and poor companies alike, so don't be hasty in selling.

You were smart to hang on – and, indeed, you bought even more shares. That can be a powerful move if you're confident in the company's future. (It's a hard move to pull off, too, when it looks like few investors have faith in the company – as was surely the case with an 80% drop.) You're right that it's imperative to understand your holdings well, so that you can act appropriately.

Exelixis' future still seems rosy: Its successful drug Cabometyx (already approved to treat kidney and liver cancer) may be approved for further treatments, and its sales can also grow internationally.

Foolish trivia

Name that company: I trace my roots back to the Hudson River Valley in New York in 1936, when a fellow bought a depleted iron mine and 100 acres on which to grow mushrooms. After World War II, aware of the need to protect vital documents from destruction, he used his iron mine to launch me in 1951. Today, based in Boston, I'm a worldwide leader in storage and information management, serving more than 225,000 organizations. My 1,450 facilities in 56 countries sport more than 90 million square feet, storing and protecting data, records, art, historical artifacts and more. I rake in more than $4 billion annually. Who am I?


Last week's trivia answer: I trace my roots back more than 230 years, to the 1790 Boston founding of Henry Wood & Company. In the 1820s, as Americans moved west and began farming, I stopped importing wheat from England. I took on a mythical name in 1896. In 1984, I moved to Norwich, Vermont, and soon after debuted a catalog for bakers. My website, launched in 1996, offers around 1,000 products and over 2,000 recipes; I opened a baking school in 2000. In 2004, I became 100% employee-owned, and then became a B Corp in 2007, committing to serve all stakeholders. Who am I? Answer: King Arthur Baking Company

The Motley Fool take

Big Blue for Big Green: Looking for a stock with plenty of growth potential and a fat dividend? Consider International Business Machines (NYSE: IBM), with a dividend recently yielding over 4.5%.

IBM's legacy business lines have struggled for years, and that's been keeping the stock depressed. But it's spinning off its managed infrastructure business by the end of this year. This will leave the new entity more focused on what it describes as "the $1 trillion hybrid cloud opportunity."

While IBM offers a public cloud platform similar to market leaders Amazon Web Services and Microsoft Azure, it's focusing instead on hybrid cloud computing. IBM is betting that its base of large customers will benefit from mixing on-premises hardware and public cloud services, instead of simply going all-in on a public cloud.

IBM's total cloud revenue increased 19% in 2020 to $25.1 billion. In its first quarter of 2021, the century-old tech giant returned to total revenue growth and beat analyst estimates for both the top and bottom lines. The company is also paying down its substantial debt, and its balance sheet is solid, with more than $10 billion in cash.

It's time to start thinking about IBM as a leader in emerging tech trends like hybrid cloud computing (as a partner in helping organizations get the most out of their data) and artificial intelligence (as a developer of AI applications).

Copyright 2021 The Motley Fool
Distributed by Andrews McMeel Syndication.

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