THE MOTLEY FOOL ASK THE FOOL

Window Dressing

Q. What’s “window dressing” in the mutual fund world? – P.W., Baton Rouge, Louisiana

A. The term refers to a company or entity doing something to make itself look better to investors, often at the end of a reporting period. For example, mutual funds disclose their holdings quarterly. If a fund’s managers want to impress, they might load up on shares of some popular stocks just before the quarter ends to give the impression that the fund has held them for most or all of the quarter.

Q. How do I figure my taxable gain when I sell shares of a stock that split 2-for-1? – G.T., Strasburg, Virginia

A. Let’s go through the math together. Imagine that you bought 100 shares of Home Surgery Kits (ticker: OUCHH) for $36 apiece, using a brokerage that charges $0 for trades. Your cost basis is $36 per share, or $3,600 for the lot. When the 2-for-1 split occurs, your 100 shares will become 200 shares (and the stock price will be reduced proportionately, leaving the value of your stake unchanged). Your cost basis will also be split 2-for-1, so it drops from $36 per share to $18 per share. (Multiply that by your 200 shares and you’ll arrive at the same original cost basis, $3,600.)

Now let’s say that sometime after the split, the stock is trading at $22 per share and you decide you want to sell. The total value of your stake is $4,400, so if you sell all your shares, your gain will be $800 – $4,400 minus the cost basis of $3,600. If you sell one share, your gain will be $4 – $22 less the basis of $18.

FOOL’S SCHOOL Investment Red Flags

When seeking promising candidates for your long-term stock portfolio, you may know to look for companies with growing revenue and profits, robust cash flow and competitive advantages. But it’s also important to make sure there are no red flags – such as the ones below.

● A very low price: An extremely low price, below about $5 per share, may entice you, but that’s a penny stock. These tend to be shares in tiny, unproven companies, and they can be very risky because they’re easily manipulated – a $3 stock could easily become a $0.20 one if its promoters dump it all at once.

● A very low valuation: If a stock has, say, a strangely low price-to-earnings (P/E) ratio or price-to-sales ratio, don’t assume it’s a bargain. Do some digging to find out why it’s so low.

● An unprofessional company website: If the company’s website looks amateurish, is under construction or doesn’t have a section for investors featuring quarterly and annual results (with audited financial statements), beware. Be even more wary if you can’t find a website for the company.

● A dividend cut: Companies will generally only reduce or eliminate a dividend if they’re facing serious challenges.

● Heavy promotion: If you’re reading or hearing that a company is about to cure cancer or strike gold, perhaps with lots of capital letters and exclamation marks thrown in, be suspicious. Specific claims about future returns – such as “poised to explode 763%!” – are also a red flag.

The more you learn about how to identify terrific companies and how to avoid problematic ones, the better your investing results are likely to be. You can learn more at Fool.com’s “Investing Basics” nook, and in books such as “The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments” by Pat Dorsey (Wiley, $25) and “The Little Book of Valuation: How To Value a Company, Pick a Stock and Profit” by Aswath Damodaran (Wiley, $26).

MY SMARTEST INVESTMENT Automation for the Win

My smartest investment move was setting up my paychecks to be direct deposited into my savings account. I’ve saved $10,000 this year by having that money routed away from my checking account, where it’s so easily spent. –

M.K., online

The Fool responds: You’re onto something very smart there. It can be hard to find the willpower to avoid spending more than you should -- but making your dollars a little less available can be quite effective.

There are many other ways to use automation to benefit your financial health. For example, you may be able to have a chunk of your paycheck automatically routed into a 401(k) account, where that money can be automatically plunked into investments you’ve chosen. (Here’s a tip: For long-term money, consider a low-fee, broad-market index fund, such as one that tracks the S&P 500.) If you can set your 401(k) account to automatically increase the portion of your paycheck that it gets by, say, 1% each year, that’s a great move, too.

You also might be able to have a portion of your paycheck automatically deposited into a retirement savings account. You could set routine bills – such as your mortgage, insurance and utilities – to autopay, too, to reduce the chance of their being paid late or forgotten.

The more of your financial life that you automate, the more financial goals you may be able to meet.

FOOLISH TRIVIA Name That Company

I trace my roots back to 1924, when a man in Germany began making shoes in a kitchen; he and his brother registered a company called Gebruder Dassler Schuhfabrik. Jesse Owens won his Olympic gold medals in Berlin wearing their wares. The brothers had a falling out and split the company; one founded me in 1949, and the other founded a company that would become Puma. I expanded into track suits in 1967. I owned Reebok and the Taylormade golf brand for some years. Today, with a recent market value topping $26 billion, I’m a powerhouse in sporting goods. Who am I?

Last Week’s Trivia Answer

I trace my roots back to 1835, when I was founded by a printer and bookbinder in Prussia. I printed mostly religious fare at first, then expanded. By the 1980s, I ran the Bantam Books imprint in the United States and then bought Doubleday and RCA Records; that made me the biggest trade-book publisher in the U.S., and RCA became the basis for my BMG music business. I’m now a major conglomerate that owns a famous publishing business, though my attempt to buy Simon & Schuster was recently blocked. Who am I? (Answer: Bertelsmann)

THE MOTLEY FOOL TAKE A Promising Deal

Pfizer (NYSE: PFE) brought in more than $100 billion in revenue last year – a record. But the pharmaceutical giant is facing some headwinds; these include declining coronavirus vaccine demand and the looming expiration of patent protection for several of its top drugs.

Today, Pfizer’s biggest problem is slowing growth. But the company has invested in its pipeline. Pfizer has bought several companies over the past few years, and predicts that its recent purchases of Arena Pharmaceuticals, Biohaven Pharmaceuticals and other companies should add $10.5 billion to revenue in 2030. Meanwhile, it plans to buy oncology specialist Seagen for $43 billion, which should drive additional billions of dollars in revenue.

Pfizer’s own pipeline of drugs in development should contribute to growth in a major way. Pfizer expects to launch 19 new products or indications over an 18-month period, expecting that 15 or so should bring in enough revenue to more than make up for patent protection losses.

Pfizer shares recently sported a forward-looking price-to-earnings (P/E) ratio under 12 – quite reasonable for a company promising so much growth, both from the internal pipeline and through acquisitions. Its share price was recently down 27% from its 52-week high, and that decline has pushed its dividend yield up to 4%. (The Motley Fool owns shares of and has recommended Pfizer and Seagen.)