THE MOTLEY FOOL
ASK THE FOOL A big red flag
Q. I’m thinking of investing in a company that has filed for bankruptcy. Should that be a deal breaker?
D.C., Richmond, Calif. A. In most cases, bankruptcy proceedings are a huge red flag and a definite deal breaker. That’s because if and when a company emerges from bankruptcy protection, the common stock of its shareholders is typically canceled and made worthless. (If it issues new shares, they won’t be given to former shareholders.) If you think the company can perform well post-bankruptcy, wait and make sure first.
Q. What are LEAPS? S.L., Dallas
A. Long-term equity anticipation securities (LEAPS) are long-term options. A regular option gives you the right to buy (via “call” options) or sell (via “put” options) a fixed number of shares of a security at a fixed price within a fixed time period, which is typically a few months. LEAPS feature expiration dates that can be several years away.
Let’s say you think that Acme Explosives Co. (ticker: KBOOM), trading at $30 per share today, will be trading at $50 or more in a year or two. You might buy call options for $10 per share that let you buy the shares at $20 at any time before Jan. 17, 2025. A set of 100 such LEAPS would cost you $1,000, which is a lot less than the $3,000 it would cost you to buy 100 shares of the stock today. If the shares appreciate as expected, you’ll profit. But if they don’t do so before the option expires, you’ll have lost your $1,000.
Options are best avoided by new investors, and even seasoned ones can do very well without them. Learn more about LEAPS in our handy reference nook, Fool.com/ terms.
FOOLISH TRIVIA
Name that company
I trace my roots back to the mid-1950s, when a seller of drink-mixing machines helped a small restaurant in San Bernardino, Calif., grow; he later bought my name and service system. My extremely efficient business model featured a limited menu — and many franchisees. Today, with a recent market value topping $210 billion, I encompass more than 40,000 eateries in over 100 countries. About 93 percent of those are franchised, by owners who pay me rent for their properties. I own a lot of real estate. My stock has grown by around 2,000 percent over the past 20 years. Who am I?
Last answer: Textron
THE MOTLEY FOOL TAKE Digital dollars
Shares of Paypal Holdings (Nasdaq: PYPL), the leading digital payments platform, were recently down 30 percent from their 52-week high and more than 75 percent from their all-time high in 2021. This presents an intriguing opportunity for long-term investors.
Businesses beginning to return to normal have slowed e-commerce and digital spending. PayPal has also been losing market share to Apple Pay. The state of the global economy and the threat of a recession around much of the world aren’t helping, either.
Despite those headwinds, PayPal still managed to grow revenue by 9 percent (on a currencyneutral basis) year over year in its fourth quarter. Total payment volume was also up 9 percent on a currency-neutral basis, to $357.4 billion.
Adjusted earnings per share (EPS) fell 10 percent in 2022, but management plans to turn that around in 2023 via cost-cutting. It’s forecasting 18 percent growth in adjusted EPS. The company is also planning to benefit shareholders this year by spending 75 percent of its free cash flow to buy back shares.
Paypal Holdings encompasses not just the PayPal platform but also Venmo, Zettle, Xoom, Hyperwallet, Honey and Paidy. Its stock seems undervalued at recent levels, and well worth consideration — but if you invest, plan on following its progress. (The Motley Fool owns shares of and has recommended PayPal.)