Q: Does it really matter if I buy an overvalued stock, as long as it eventually grows in value? I'm buying for the long term, after all. – F.H., Ardmore, Indiana
A: Ideally, we should buy stocks that seem undervalued, as they offer a margin of safety. Buying overvalued stocks can be risky, as they might drop closer to their intrinsic value at any time, especially over the short term. Yes, over the long term, the intrinsic value of healthy and growing companies will grow. But it's still possible to simply pay too much for a stock.
Consider, for example, networking titan Cisco Systems, which was a market darling before the internet bubble burst. Cisco's stock was trading between $55 and $59 per share (on a split-adjusted basis) back in 2000 – but recently it was trading at around $52 per share. Those who bought the stock near its peak back then are still underwater – 21 years later!
Companies and their stocks don't always perform as you hope or expect, so it's best to reduce your risk by focusing on healthy and growing companies, ideally with little to no debt, that are trading for much less than they're likely to be worth in the future.
Q: How can I access the earnings reports that companies file with the Securities and Exchange Commission (SEC)? – J.N., Strasburg, Va.
A: Try starting at a company's own website, where it's likely to have an "Investors" area, with links to earnings reports and other resources. Or call the company's Investor Relations department and ask if they can mail you the latest filings. You can also look up companies' quarterly 10-Q and annual 10-K reports at SEC.gov/edgar.shtml.
How to pick a brokerage: If you're thinking of investing in the stock market, you're probably going to need a brokerage account. There are lots of good brokerages to choose from, but doing a little research first can help you zero in on the ones that will serve you best. Here are some considerations:
- Minimum initial deposit: With some brokerages, you might need $2,500 to open an account, while other brokerages require $500 or even $0. (Some have no minimum for IRA accounts.)
- Costs: Check out what your candidate brokerages charge to trade stocks, mutual funds, ETFs and more, and for any other services you might use, such as money transfers. Many brokerages these days charge nothing for most trades.
- Research: Many good brokerages offer free in-depth research reports on a wide variety of investments from sources such as Argus, Credit Suisse, Morningstar, Ned Davis, S&P, The Street, Thomson Reuters, Zacks and more.
- Mutual funds: If you plan to invest in mutual funds, you can usually do so via the website of each fund, but it can be much more convenient to do so through your brokerage. So consider how many funds, and which families of funds – such as Vanguard, Fidelity or Schwab – are available through any brokerage you're considering.
- Banking: Some brokerages these days offer banking services, such as checking accounts and mobile bill paying. If that's of interest to you, see which brokerages offer it.
- Convenience: Some brokerages exist online only, so if you would like to do business at a physical location, stick with those that have a local branch near you. Some of these factors will be more important to you than others. For example, pay less attention to trading commissions if you trade very infrequently.
You can read reviews of good brokerages and compare them at our sister company, The Ascent, at TheAscent.com. Or use an online search engine, searching for terms such as "compare brokerages" or "best brokerages."
My Dumbest Investment
Hot Stock Tips Can Burn: My dumbest investments have been stocks I bought after listening to tips from well-meaning friends. Needless to say, they didn't turn out well. – I.G., online
The Fool responds: It's easy to be tempted to act on hot stock tips from friends or relatives – or even from strangers. It's best to exercise restraint, though. For one thing, any particular recommended stock might end up heading south instead of north, taking a chunk of your money with it.
Keep in mind, too, that you don't necessarily know where the tip came from: It might be from your friend's friend who's a savvy investor – or from their dentist, a mediocre investor who read some hype about the company online. It would be helpful to know just how good a track record the person recommending an investment has, but that's probably a mystery. Even with financial talking heads on TV who are presented as investing experts, we generally don't know how good or bad they are at stock-picking.
In general, one of your best moves upon receiving a hot stock tip is to ignore it. The other is to do your own research into the company: See if it's healthy and growing, if it has sustainable competitive advantages and if it's priced below what it's really worth. If you buy it after researching it, you'll be making an informed decision rather than just taking your chances.
Name that company: I trace my roots back to 1902, when there were only 23,000 cars on the road in the U.S. – one car for every 739 horses! Nine motoring clubs joined forces to create me. Over the years I've advocated for better roads and bridges, driver education and motorists' legal rights, among other things. I was the first to offer roadside assistance for motorists, in 1915. (I respond to almost 30 million calls for help each year.) Today, based near Orlando, Fla., I boast more than 62 million members and more than 1,000 branch offices. I'm a travel agency, too. Who am I?
Last week's trivia answer: 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? (Answer: Iron Mountain)
The Motley Fool Take
Testing, testing: Is this stock on? Quidel (Nasdaq: QDEL) is a small but growing company focused on health diagnostics and testing, including testing for COVID-19. The company had an outstanding 2020, with revenue more than tripling year over year due to huge demand for its COVID-19 offerings. Revenue for the first quarter of 2021 more than doubled over year-ago levels, too.\u0009That's all exciting, but the stock was recently down more than 60% from its 52-week high, as investors see vaccinations taking hold and expect a slowdown in testing for COVID-19. Testing isn't likely to go away anytime soon, though, as much of the world is still not vaccinated and variants of the virus keep materializing.
Meanwhile, Quidel has reached a distribution deal with McKesson to distribute its at-home COVID-19 tests, which will open up more opportunities in the near future. More deals like this will drive revenue growth.
Quidel isn't a stock to just buy and forget about: Much depends on how long people will continue to need testing for COVID-19, as well as on how the company's business will adapt once the pandemic is really over. But at the very least – recently trading near 52-week lows and with a market value recently below $5 billion – Quidel looks to be a promising buy in 2021, with much room for growth. (The Motley Fool owns shares of and has recommended Quidel.)
Copyright 2021 The Motley Fool
Distributed by Andrews McMeel Syndication.