THE MOTLEY FOOL
Q: What's the S&P 500 that I see referred to everywhere? – P.T., Knoxville, Tenn.
A: The Standard & Poor's 500 Index is a list of 500 of America's biggest companies, with a median market value of around $21.5 billion. You'll see the term "S&P 500" all over the financial world because it's often used as a proxy for the entire U.S. stock market, or at least for the universe of large companies. Together, the companies make up about 80% of the value of the total U.S. stock market
The index is full of familiar names, such as 3M, Amgen, Apple, Best Buy, Chipotle Mexican Grill, Coca-Cola, Costco, CVS Health, Dollar Tree, Facebook, Ford, IBM, Johnson & Johnson, Kroger, Lowe's, Microsoft, Netflix, Nike, PepsiCo, Starbucks, Target, Walmart and Xerox, along with some less familiar ones.
It's useful to compare your own investments' performance with that of the S&P 500. If you're not beating the S&P 500 over several years, consider just investing in a low-fee S&P 500 index fund instead, such as the Vanguard 500 Index Fund (VFINX) or the SPDR S&P 500 ETF (SPY). Index funds outperform the vast majority of actively managed mutual funds – in part due to lower fees – and they're great long-term options for all kinds of investors. Learn more about index funds at Fool.com and Investor.gov.
Q: What's a good book to introduce me to investing? – A.K., Hackensack, N.J.
A: Here are some good ones: Peter Lynch's "Learn to Earn" (Simon & Schuster, $18), John Bogle's "The Little Book of Common Sense Investing" (Wiley, $25) and "The Little Book That Still Beats the Market" by Joel Greenblatt (Wiley, $25).
Look Beyond Stock Prices
Beginning investors often make the mistake of concluding too much from a stock's price. For example, they may assume that a $30 stock is "cheaper" and a better bargain than a $75 stock. That's not necessarily true.
Consider Southwest Airlines and Alaska Air. In the past month, each one had a stock price near $33. But the two companies, while both generally well-regarded, are quite different. The market capitalization of Alaska Air was recently about $4.4 billion, for example, far lower than Southwest's market cap near $20.4 billion. Market capitalization is a stock's market value – the total value of all its outstanding shares; Alaska Air recently had about 123 million shares outstanding, while Southwest had 589 million. Both companies have recently suspended their dividends, but before doing so, Alaska Air's dividend yielded around 4.3%, while Southwest's yield was around 2.2%.
So which one is the better value? Well, Alaska's heftier dividend yield would have been more appealing – but Southwest's dividend was growing more rapidly in recent years, and that can count for a lot. Also consider the price-to-earnings (P/E) ratio – the current stock price divided by the last 12 months' worth of earnings per share (EPS). Alaska Air's P/E ratio was recently 8.7, while Southwest's was 10.4. A lower P/E ratio generally indicates a better value.
Never rely on any one or a few numbers when deciding whether to invest your money in a company. Your hard-earned dollars, invested properly, could grow to provide a down payment on a home or critical retirement income. So take your investing seriously, and don't act on hunches or someone else's hot tip.
A stock's price doesn't tell you much at all, except how many shares you can buy with the money you have. Look at a wide range of factors when studying a company, such as its management, brand strength and competitive advantages; its debt load, revenue and earnings growth rates and other figures; and its risks, challenges and more.
My Dumbest Investment
A Qwik Reversal of Fortune
My dumbest investment was selling my shares of Netflix back in 2011, when it was plummeting due to perceived bad news. I learned not to get scared out of big winners because of short-term bad news hyped by the media. – B.T., online
The Fool responds: Netflix has been a phenomenal investment for those who bought relatively early and hung on through the turbulence of 2011. The earliest investors have done best, but even if you bought in mid-2010, before the events of 2011, your investment would have grown more than 25-fold! (And its future still seems bright.
So what happened in 2011? Well, the company had begun by letting customers rent DVDs through the mail, and it eventually added the option to stream videos. In mid-2011, the company announced price hikes, along with plans to split Netflix into two separate companies – with Netflix focused on streaming video and Qwikster focused on DVDs. The plan was not well-received, and many subscribers quit; after a poor quarterly report, shareholders sold even more, sending shares plunging more than 30%. The company abandoned the idea.
If, at the time, you didn't have faith in management, selling was the right thing to do. (You could always have bought back into the stock later.) If you still thought the company's future was rosy, though, hanging on would have been the best – and most profitable – thing to do.
The Motley Fool Take
Defense companies expect procurement to slow while government employees work from home or are distracted by the ongoing pandemic. They may face factory shutdowns, too, if local jurisdictions recommend social distancing. But the demand for weapons hasn't changed – and the government is still a willing buyer. So consider General Dynamics (NYSE: GD) for your portfolio.
General Dynamics has been an underperformer among defense stocks in recent years because of its Gulfstream business jet unit. The business-jet market never recovered from the 2008-2009 recession. But the company has a solid backlog of defense contracts, including landing the largest shipbuilding contract in history in December. Its shipyards are responsible for the bulk of the nation's nuclear submarines, including the forthcoming Columbia-class ballistic missile submarine, a key cog in the U.S. military's nuclear deterrence strategy.
In addition, General Dynamics' huge government I.T. business could benefit from the pandemic if government agencies need to upgrade their tech systems to deal with additional remote workers.
The company was recently trading with a forward-looking price-to-earnings (P/E) ratio in the low teens, and its dividend yield was about 2.8%. This could be a difficult six-month period to hold the stock, assuming the economic slowdown continues into the second half of 2020 (at least), but for patient investors, General Dynamics looks poised to pay off over the long run.