Signs of a good stock
Q: How can I spot signs of a good stock? Does the economic environment matter?
A: Contrary to what many think, a struggling economy can be good for buying stocks, as it typically features more bargains than an economy firing on all cylinders. People are often eager to buy when the market is booming, but many stocks are overvalued then.
With any stock you’re considering, you need to get to know the underlying company very well. Examine its annual and quarterly reports, evaluating factors such as its debt load, profit margins, free cash flow and growth rates.
Superinvestor Warren Buffett says that he looks for “(1) businesses we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people and (4) priced very attractively.” It’s hard to beat that formula.
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Q: What distinguishes a public company from a private one?
A: A public company has sold some shares of itself to the public and is generally required to file quarterly earnings reports with the Securities and Exchange Commission, detailing revenue, expenses, taxes, debt loads, cash levels, income or losses and much more. These reports are available to the public. Privately held companies don’t have shares available for the public to buy, and they don’t have to reveal much.
ETFs would have been better
Dear Fool: I got into investing when a business professor said he didn’t care if the price of gas went up or down because he owned stock in the gas company and collected his dividend regardless. I repeatedly saw new investors encouraged to buy just one stock and get some skin in the game.
I would have preferred to have been encouraged to buy exchange-traded funds (ETFs) when I had limited funds, especially since I can buy and sell them for free through my brokerage if I hold for more than 30 days. That is a really great way to get some skin in the game. I am a believer in ETFs that charge low fees, as that has helped my portfolio’s performance.
The Fool responds: You’re smart to seek out low fees, as that can make a big difference in your results over long periods.
The advice to start by buying into one stock isn’t necessarily bad. You might find it much more interesting and motivating to be invested in a certain company you like and believe in than a fund made up of dozens or hundreds of companies.
A fund does offer diversification, though, which is a plus. (ETFs are often based on broad indexes such as the S&P 500.)
You can do very well sticking just with ETFs, but carefully selecting some individual stocks can be profitable, too — ideally via a low-cost brokerage.
Take to the sky
Skyworks Solutions (Nasdaq: SWKS) is a major supplier of chips to smartphone giants such as Apple and Samsung, with the growth of mobile devices and wearables driving revenues from $1.5 billion to $3.2 billion in just three years.
Skyworks’ management is aiming to broaden its revenue base.
In addition to supplying RF (radio frequency) chips for smartphones, it sells analog semiconductors for wireless infrastructure, broadband applications, and the automotive, medical and military markets, among others. The company is also well positioned to supply chips for a rapidly expanding global 4G LTE network.
Skyworks is a play on the future of the Internet of Things (IoT), too — where a wide range of products (such as thermostats, cars, heart implants and oil rigs) connect to the internet and one another via sensors.
Unfortunately, that’s the long-term case for Skyworks, and Wall Street, with its short-term mindset, has sold off shares due to worries about slowing smartphone sales and the company’s slowing revenue growth.
If Skyworks can get its RF chips into many devices accessing a rapidly expanding 4G LTE network, lessen its dependence on Apple for top- and bottom-line success, and expand into more IoT categories, this stock could be a big winner over the next decade. Give it a closer look. (The Motley Fool owns shares of and has recommended Skyworks Solutions.)
