Motley Fool for Aug. 29
ASK THE FOOL
REVERSE-SPLITTING HEADACHES
Q: Should a company's reverse split worry me? - R.S., Larkfield-Wikiup, California
A: It's at least a red flag. A healthy and growing company will occasionally execute a reverse split, but it's mainly enterprises in trouble that do so, to prop up their very low stock prices.
Imagine a stock trading at $3 per share. If you own 200 shares and the company executes a 1-for-10 reverse split, you'll end up with 20 shares, priced around $30 each. Note that before and after the split - just as with regular stock splits - the value of your shares is the same: $600. All that happened is that the company increased its stock price by decreasing its number of shares.
Some reverse splits happen so companies can avoid being delisted from stock exchanges with required minimum price levels. Many mutual funds aren't allowed to own stocks with share prices below $5, so a reverse split can help there, too.
It's often smaller, less well-known firms that execute reverse splits, but here are some rather sizable companies that have done so: Citigroup, AIG, AT&T, 7-Eleven and Priceline.
If a company you're interested in plans a reverse split, there's a good chance it's in trouble, and you should learn more to decide whether you want to hang on.
Also, if you see that a beleaguered company is suddenly trading at a higher price, that may signal a reverse split and not an operational turnaround.
Q: How does using an online brokerage work - do I deposit money into my account just by mailing in checks? - J.J., Jamestown, Indiana
A: That's one way to do it. You can also use direct deposit or electronic transfers. Learn more about brokerages and how to choose a good one at broker.fool.com.
FOOL'S SCHOOL
IS IT TIME TO REBALANCE YOUR ASSETS?
Your asset allocation is how you've distributed your assets among categories such as stocks, bonds and cash. You can't just set it and forget it, though - assets need periodic rebalancing.
That involves resetting your portfolio to your intended asset allocation.
For instance, suppose that your plan calls for having 60 percent of your assets in stocks, 30 percent in bonds and 10 percent in cash. Well, you might start out with that allocation, but perhaps after a few years, stocks have grown to be 75 percent of your portfolio and bonds are 20 percent, with only 5 percent in cash. It's time to rebalance!
To rebalance, you would sell off some of your stock holdings, adding more to bonds and cash, until you're back to your desired 60-30-10 proportions. If your holdings are in a few broad index funds that track the stock and bond markets, rebalancing can be rather simple.
If you hold individual stocks and bonds, or a variety of mutual funds, you'll need to trim from your least promising holdings.
(Do give index investing some consideration. You can be invested in all of the S&P 500 with the SPDR S&P 500 ETF (SPY) and in a wide range of bonds with iShares Core U.S. Aggregate Bond ETF (AGG).)
You might rebalance on a deeper level, too, such as if a certain stock holding has surged and now represents a big chunk of your stock portfolio. If Carrier Pigeon Communications (ticker: SQUAWK), for example, used to be 10 percent of your stock holdings but is now 20 percent, that can be a bit risky.
If the stock heads south, it will have a big effect on your overall return.
There is merit to letting your winners run, but it's smart to pay attention and sell or pare back when a holding seems significantly overvalued, or if it's starting to dominate your portfolio.
You can learn more about smart asset allocation strategies and rebalancing at fool.com/retirement and in our "Rule Your Retirement" newsletter service, which you can try for free at fool.com/shop/newsletters/index.aspx.
MY DUMBEST INVESTMENT
I DIDN'T UNDERSTAND WHAT I WAS DOING
Selling Apple in the 1980s was one of my dumbest moves. Dumber still was selling it because I did not want to own Apple stock anymore and then putting the funds into a mutual fund that held Apple stock. It was all dumb because I did not understand what I was doing. I don't even want to calculate what I would have had if I had not sold. - A.B., Rochester, Minnesota
The Fool responds: Having sold their Apple stock is a mistake that many, many investors have made. But think back to the mid-1980s. You couldn't know then what a juggernaut Apple would become, and how it would invent whole new product categories.
In fact, in the 1980s, Apple wasn't a clear long-term winner. Apple did introduce its successful Macintosh computer in 1984, but that was a year after its $10,000 Lisa computer debuted - and flopped. For many years, Apple products held a small market share relative to PCs.
It wasn't until Steve Jobs returned to his company in 2000 after an exile, and Apple started launching offerings such as the iPod, iTunes store, iPhone and so on, that the company was looking very much like a winner. Today, iPhones generate most of its revenue.
Your mutual fund observation is a good one, too. Few people look into exactly what their funds have been holding. Holdings change over time, but it's worth checking, lest you end up surprised.
FOOLISH TRIVIA
NAME THAT COMPANY
I was formed back in 1906, when the president of a bank joined forces with the Pensacola Advertising Co., which prepared posters for an opera house. The introduction of the Ford Model T two years later was good for business. During World War II, I advertised war bonds, among other things. Today, based in Louisiana, I'm one of North America's biggest outdoor advertising companies, with more than 144,000 billboard faces, 130,000-plus interstate logo signs and 40,000-plus transit and airport displays. I even have more than 2,000 digital billboards. My market value tops $5 billion. Who am I?
LAST WEEK'S TRIVIA ANSWER
I trace my roots back to 1925 and an evaporated milk processing facility in Illinois. Today, based in Dallas, I'm the nation's largest processor and direct-to-store distributor of fluid milk. In 2001 I was bought by Suiza Foods, which took my name. Over the years I acquired many companies and spun some off, such as TreeHouse Foods and WhiteWave Foods. My brands today include Alta Dena, Berkeley Farms, Country Fresh, DairyPure, Garelick Farms, Lehigh Valley Dairy Farms, Mayfield, McArthur, Meadow Gold, Oak Farms, T.G. Lee, TruMoo and Tuscan. I rake in more than $9 billion annually. Who am I? (Answer: Dean Foods)
THE MOTLEY FOOL TAKE
FUN AND PROFITS
Things have been rough for toy maker Mattel (Nasdaq: MAT), with revenue, earnings and profit margins shrinking in recent years and the stock plunging, too. Slumping sales of key brands, such as Barbie and Fisher-Price, have plagued Mattel, and a new CEO is in place to attempt to right the ship.
Mattel's problems run much deeper than its brands being out of style, though. The culture at Mattel is said to be a mess, with meetings and bureaucracy reportedly hindering necessary creative work. These issues will need to be fixed before any turnaround can take place, but Mattel offers promise.
While the toy industry is fickle and the hot toy of today is the forgotten toy of tomorrow, Mattel has a portfolio of brands that have been around for decades, including Barbie, Hot Wheels, American Girl, Mega Bloks and Fisher-Price. These brands have stood the test of time, and the company has the resources to turn things around - eventually.
While investors wait for Mattel to return to growth - in part via cost-cutting and innovation - they can collect a massive dividend, which recently yielded a hefty 6.7 percent. There's a risk that Mattel will reduce the dividend if things get worse, so that shouldn't be your only reason for buying the stock. But for believers willing to wait a few years, Mattel offers a compelling opportunity.