Ignore stock splits in investment decisions

Motley Fool

Q: I would think that Netflix, with its shares near $360 each, might split its stock soon. Would that be a good time to buy? — G.C., Las Cruces, New Mexico

A: Stock splits might seem exciting, but they’re not too meaningful.

When a stock splits 3-for1, if you originally owned 100 shares, you’d end up with 300. They’re not worth three times as much, though. Their price is reduced proportionately, so if they were trading at roughly $60 pre-split, they’ll be around $20 apiece post-split. Their total value is $6,000 both before and after the split — 100 shares times $60, or 300 shares times $20.

Whether Netflix splits its shares shouldn’t matter to you. The important thing when investing is to make sure that you’re buying into a strong and growing company and that you’re not paying too high a price. That valuation isn’t measured by the stock price alone: A $9 stock can be overvalued and likely to fall, while a $1,000-pershare stock might be undervalued and on its way to $2,000 within a few years. Assess valuation measures such as price-to-earnings (P/E) ratios, price-to-sales ratios, and price-to-cashflow ratios, and compare them with previous years and with those of competitors.

Fool’s School: Don’t be fooled by numbers

Great investors look at numbers carefully and critically because the numbers are not always as terrific (or terrible) as they might seem.

Don’t get too excited, for example, if a company reports “record earnings.” Perhaps Farm Dogs Inc. (ticker: BINGO) earned $2.75 per share in 2015, $2.76 in 2016, $2.78 in 2017, and $2.80 in 2018. That $2.80 might be a record high, but it’s also marking merely a 2 percent total increase over four years. Look for growth rates instead of record highs.

Next, imagine that Chicken Little Industries (ticker: SKYYY) reports revenue up a whopping 100 percent over the past year. That’s more telling than “record earnings” and would intrigue most investors. Look into what the actual revenue numbers are, though. Chicken Little might have taken in only $250,000 in 2017. One hundred percent growth would put it at $500,000 in 2018. That’s good, but it’s still a meager sum.

Put each company in context, too. For example, smaller companies can grow more quickly than larger ones, as it’s usually easier to double $50 million than $50 billion. As companies grow larger, expect their growth rates to slow.

“Annualized” growth rates also can fake you out. When a company (or mutual fund) takes its total return over a number of years and annualizes it, it’s telling you how much it earned, on average, per year. This can be meaningful, but it’s smart to see exactly what period of growth is reflected, and also to check for any outsize number that can skew the average.

Say that Groundhog City (ticker: WDCHK) increased its earnings from 50 cents per share in one year to $1 per share five years later, giving it an annualized growth rate of 15 percent. If Buzzy’s Broccoli Beer (ticker: BRRRP) doubled its earnings in three months, its annualized rate would be more like 1,500 percent. Annualizing a short period’s returns can magnify the gain or loss. Those might have been extraordinary months.

Name that company

I trace my roots to a 1971 spinoff from Columbia Broadcasting System, when I became a public company. I merged with Paramount Communications in 1994 and CBS in 2000, and then split from CBS in 2005. Today, I’m a creator of television programs, movies, games, podcasts and other consumer products. With a market value recently north of $11 billion, I reach more than 4 billion viewers in 183 countries with my networks, which include Nickelodeon, Nick Jr., MTV, BET, Comedy Central, VH1, TV Land, CMT and Logo. My Paramount Pictures is America’s oldest film studio. Who am I?

Last week’s answer

When you think of luxury, you should think of my (long and complicated) name. I’m the result of a 1987 merger, but many of my businesses were launched long ago. One of my wine businesses took shape in 1593, for example. Based in France, I’m a purveyor of wine, champagne, cognac, fashion, leather goods, perfumes, cosmetics, watches, jewelry and more. Brand names under my roof include Chateau d’Yquem, Dom Perignon, Christian Dior, Givenchy, Bulgari, TAG Heuer and Sephora. Who am I? (Answer: LVMH Moet Hennessy Louis Vuitton)