The Motley Fool: Every Sunday, useful tips on investment
Q: Apple posted record sales of devices in its last quarter, yet its stock fell. Why?
A: It all comes down to expectations. Apple reported record sales of $57.6 billion in its first quarter of 2014, and a record number of iPhones and iPads sold — 51 million and 26 million, respectively.
That’s terrific, but while earnings were a bit above analyst expectations, revenue was below. And investors had been expecting to see several million more iPhones sold, too. Falling short of expectations can send a stock tumbling, at least in the short run.
As the stock market rises and falls, many investors might wish for less-volatile investments. Meet “market-neutral” investments, designed to deliver returns not too tied to those of the overall stock market.
For most traditional stock funds, if the overall market goes up, your fund will, too; a down market will typically pull your fund share price down as well. That’s because typical stock mutual funds buy stocks only.
Typical market-neutral investments will usually have both long and short positions in different stocks. (A long position is when you buy a stock expecting it to rise in value. A short position is where you profit if the investment heads south.)
Market-neutral fund managers aim to make more from their long positions than they lose in their short positions when the overall market rises, and to make bigger profits from their shorts than losses from longs when the market drops.
The concept sounds great, but do such strategies actually work? Well, in many cases, they haven’t performed as well as expected.
Think back to 2008, when the S&P 500 lost close to 40 percent. Several market-neutral funds lost substantial amounts of money during 2008’s bear market and also missed out on the rebound in 2009.
Some posted smaller losses than the overall market, but they were supposed to gain in both good markets and bad.
Market-neutral funds are another kind of investment promising the best of both worlds: solid returns without the risk that most stock investments have. We shouldn’t count on seeing those promises come true.
General Motors (NYSE: GM) has seen its stock fall more than 10 percent in 2014, in part due to a disappointing fourth-quarter earnings report. The stock may be a more compelling portfolio candidate than many think, though.
Two of the biggest challenges that contributed to GM’s bankruptcy continue to linger: It still has underfunded global pension liabilities of nearly $20 billion, and it has lost nearly $20 billion in Europe over the past 15 years.
Despite that, General Motors simply isn’t the same company that failed so catastrophically during the recession.
With forward-thinking new management, it has reduced its bloated cost structure and refocused on making cars people really want to buy.
The new Chevy Impala was named Consumer Reports’ best sedan, and the Corvette Stingray and Chevy Silverado were named the North American car and truck of the year, respectively, at the Detroit 2014 auto show.
Sales expectations are high for 2014, and GM has been confident enough to initiate a dividend, recently yielding 3.4 percent.
General Motors offers a forward-looking price-to-earnings (P/E) ratio near 7, a more profitable product line than it has seen in years and a North American market that is still harboring significant pent-up demand.
Consider buying in before the market values this reinvigorated business for what it’s worth.