Annual report won’t gauge stock’s value
Q: Does an annual report show how overvalued or undervalued a company’s stock is? — C.C., Madison, Indiana
A: Annual reports don’t focus on companies’ valuations. You can see what value the market is ascribing to a company via its market capitalization (or “market cap”).
You’ll find market caps online at sites that offer data on stocks. For example, click over to finance.yahoo.com, type in a company’s name or ticker symbol, and you’ll find its market cap. It’s arrived at by multiplying the stock price by the number of shares outstanding.
A company’s intrinsic, or fair, value is harder to determine, and different smart analysts will have varying estimates based on different assumptions about the company’s growth prospects, among other things.
Still, it’s well worth reading the annual reports of any companies that interest you. If you’re a beginning investor, at least read the CEO’s letter to shareholders, which offers a sense of management character and the company’s strategic plan.
The financial statements are even more informative. The balance sheet reflects the company’s financial health at one point in time, including its cash, money it owes, money owed it, etc. The income statement (sometimes called the statement of operations) shows sales, costs and profits over a certain period, while the statement of cash flows will list all the company’s cash inflows and outflows during the period.
Fool’s School:
A Buffett hero
Warren Buffett isn’t the only investing master we can learn from. Meet Philip Carret, a Buffett “hero” who died in 1998 at age 101. His investment career spanned 70 years, and he beat the market soundly. Carret started Pioneer, the third-oldest U.S. mutual fund, in 1928. Over 55 years, his average annual return was an impressive 13 percent. (The overall stock market has averaged annual gains of close to 10 percent over long periods.)
Here are Carret’s famous “12 Commandments” of investing, slightly paraphrased:
1. Never hold fewer than 10 stocks covering five industries.
2. At least once every six months, re-evaluate every stock you own.
3. Keep at least half of your money in income-producing securities, such as dividendpaying stocks.
4. Consider dividend yield the least-important factor in analyzing any stock.
5. Be quick to take losses and reluctant to take profits.
6. Never put more than 25 percent of your money into securities about which detailed information is not readily available.
7. Avoid inside information as you would the plague.
8. Seek facts diligently, advice never.
9. Ignore mechanical stock-picking formulas.
10. When stocks are high, interest rates are rising and business is prosperous, keep at least half your money in short-term bonds.
11. Borrow money sparingly and only when stocks are low, interest rates are low and falling and business is depressed.
12. Set aside a moderate proportion of available funds for the purchase of long-term options on stocks in promising companies whenever available.
We can learn a lot from Carret’s investing — and life. He didn’t spend every available minute investing. He made time for things he enjoyed, such as viewing eclipses around the world.
Foolish trivia:
Name that company
I trace my roots to a store that opened in a converted San Diego airplane hangar in 1976. The first store with my current name opened in Seattle in 1983. I targeted only small businesses at first, but expanded to serve select consumers. My revenue soared from zero to $3 billion in less than six years. I offer employees higher pay than my rivals do and mark up my offerings by no more than 15 percent. My stock has grown by more than 10 percent annually over the past 30 years. I operate about 725 warehouses. Who am I?
Last week’s trivia answer
I trace my roots to California in 1940, when a barbecue drive-through was founded by two New Hampshire brothers. In the 1950s, milkshake-machine salesman Ray Kroc became a franchising agent. He bought out the brothers in 1961. Today, I’m a global giant in the quickserve industry. Who am I? (Answer: McDonald’s)