The Motley Fool: Every Sunday, useful tips on investing
Q: Should I avoid a company with a return on equity that’s above 100 percent?
A: Not necessarily.
A company’s return on equity (ROE) reflects the productivity of the net assets (assets minus liabilities) that its management has at its disposal.
It’s a ratio dividing net income by shareholder equity. (Net income is found on a company’s income statement. Shareholder equity is found on the balance sheet, and it’s also what you get when you subtract liabilities from assets.)
It’s underappreciated that a company’s ROE can be skewed by high debt levels.
Marlboro cigarette maker Altria, for example, recently reported ROE topping 100 percent. Look at its last balance sheet, and you’ll see $3.2 billion in cash and ... $14 billion in debt.
Debt can be a problem if a company can’t pay it off, but Altria has lots of free cash flow.
Q: Do reverse stock splits matter?
A: Consider them red flags, as they’re usually executed by companies in trouble or facing challenges. Here’s how they work:
If you own 200 shares of a stock trading at $1 per share, and the company announces a 1-for-10 reverse split, then you’ll end up with one share for each 10 that you owned.
You’ll have 20 shares, priced around $10 each. Note that the total value of your shares doesn’t change — it’s still $200. All that really happened is the company increased its stock price by decreasing its number of shares.
Reverse splits are often done to avoid getting delisted from a stock exchange that has minimum stock-price requirements.
They can also prop up stock prices so they look less embarrassing. Be wary of companies announcing reverse splits.
Dear Fool: I bought stock in Research in Motion, the maker of BlackBerry phones, when it was down about 20 percent.
It was a huge Canadian success story, with lots of cash and a great management team (or so I thought).
I did not have a BlackBerry device, but my husband and most co-workers did. I saw the iPhone as more of a “fun” phone, and BlackBerry as a business phone.
I did consider selling for a small loss, but I didn’t want to lose — I wanted to at least break even. As it dropped, I wondered if I should buy more to “average down.” But I didn’t. I eventually sold most of my shares for roughly an 85 percent loss.
The Fool responds: Many gave up on BlackBerry, as the company now calls itself, but it has been turning itself around, with its stock gaining more than 30 percent in 2014.
You were smart not to average down, as plunging stocks are often plunging for good reasons. Aiming to break even in such situations is often a bad idea, too.
Corning’s (NYSE: GLW) stock surged some 44 percent in 2013 and seems to have more room to run, at least for patient investors.
The specialty glass and ceramics giant supplies critical components for smartphones, tablets, laptops, LCD televisions and more.
It’s known for innovation, such as with its ultrastrong Gorilla Glass, used in i-devices and elsewhere, which it has been making even stronger and thinner — and, recently, antimicrobial, too.
It has also developed a flexible “Willow” glass suitable for solar-energy cells, among other things.
Corning has struck a promising partnership with Samsung, increasing its access to Asian markets, and it’s aiming to expand the use of Gorilla Glass in the automotive and architectural arenas.
This pioneer in fiber-optic technology, which gets about a quarter of its revenue from the telecommunications industry, is also poised to profit from an uptick in capital spending by telecom companies.
Most investments have some risks, and Corning is no exception. The LCD market has been weak lately, depressing business, and some worry about manufactured sapphire replacing glass in many displays.
Corning has been around for more than 160 years and is diversified across five operational segments.
With a dividend yield of 2.1 percent, the company offers an attractive combination of reasonable valuation, balance-sheet strength and growth potential.