The Motley Fool: Every Sunday useful tips on investing
Q: Do annual reports indicate how overvalued or undervalued a company’s stock is?
A: Not usually, but you’d do well to read your holdings’ annual reports anyway.
If you’re a novice, 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 can be even more informative. The balance sheet will show you the firm’s financial health at one point in time, including its cash, money it owes, money owed to it, etc.
The income statement (sometimes called the statement of operations) shows sales, costs and profits over a period of time, while the statement of cash flows will list all of the company’s cash inflows and outflows during the period.
The more familiar you become with financial statements (perhaps just by reviewing many of them), the better chance your portfolio will have of performing well.
Annual reports don’t focus on companies’ valuations, though.
For that, you can look up a company’s current market value easily via online stock quotes. Just click over to a site like finance.yahoo.com, type in a company’s name or ticker symbol, and look for “market capitalization” (or “market cap”).
You can also calculate it yourself by multiplying the current stock price by the number of shares outstanding.
Many financial pundits like to predict what the market will do in the near future as they urge you to buy or sell “now.”
Unfortunately, they’re often wrong.
No one can consistently and accurately know what the market will do in the short term. In the long term, though, the trend is clear: The market rises.
In a famous study, University of Michigan finance professor H. Nejat Seyhun found that an investment held in the stock market from 1926 through 2004 would have delivered an average annual return of 10.4 percent, turning $1 into $1,919.
But get this: He also found that if you were out of the market (i.e. not invested in it) for the market’s 12 best-performing months, your average annual return would be only 7 percent.
If you sat out the 48 best months, you’d be down to a mere 2.7 percent, turning your dollar into $6.46. Miss just the 10 worst days and your annual average jumps to 12.8 percent.
Much of the market’s gains can occur on just a few days. So anyone who tries to time the market risks missing out on substantial profits. Learn more at indexfunds.com.
Think Corning and you might think glass, but there’s much more to this high-tech giant. It’s in the business of specialty glasses and ceramics, supplying fiber-optic networks, LCD television makers and more.
Glass has been around for thousands of years, but Corning keeps innovating.
Its robust Gorilla Glass is now found on millions of mobile phones and tablets, and it has recently introduced Willow Glass, which is thin and flexible. Gorilla Glass is present on more than 1 billion devices from more than 33 brands.
The latest version of it is reportedly 50 percent stronger than the last version, and will hide some 40 percent of scratches from the naked eye.
All is not rosy at Corning right now, though, with profit margins shrinking recently and debt inching up (though its cash is plentiful). But sales of televisions are expected to pick up in 2013, and mobile devices are proliferating rapidly. Corning’s future is likely to be brighter than its present.
Analysts expect the company to grow by about 12 percent annually over the next five years, so with its recent price-to-earnings (P/E) ratio of 10 and its forward P/E near 8, Corning’s stock seems rather attractively valued. It even offers a dividend, recently yielding 3 percent.