Price matters
Q If I find a great company, does it really matter whether I buy my shares at a fair price or an overvalued price? As long as it goes up, won't I still make money in the long run? — P.D., Bakersfield, Calif.
A You're right to think of the long run, but you'll make less money if you're buying an overvalued company. You may even lose money.
Imagine the Fingernail-on- Blackboard Car Alarm Co. (ticker: AIEEEE), which is trading at a fair price of $20 per share. If it's expected to grow at 12 percent per year for the next 10 years, it should trade around $62 per share in a decade.
If you buy at $20 per share, your total gain over the decade will be 210 percent. However, if you pay $40 for it now, it will return only a total of 55 percent on its way to $62, about 4.5 percent per year. You'd likely make more investing in certificates of deposit, with much lower risk. Remember too that the stock might hit $82 instead of $62, but it might also rise to only $50. It all depends on a combination of the company's performance and investor expectations about the stock and the overall market.
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Prudent investors aim to buy companies at a discount to their estimated fair value. If you buy at a higher price, you'd better be sure the firm will grow at a reliable pace.
Q For years I've been investing in Exxon Mobil directly, without paying any broker commission fees. Can I do the same with General Electric? — Carl Sandberg, Phoenix, Ore.
A You're using a plan called a DRIP, which stands for dividend reinvestment plan. It's an excellent option offered by hundreds of major companies. Learn more at www.fool.com/ school/Drips.htm and www.dripcentral.com
Global investing
The idea of investing in some foreign companies in order to diversify your portfolio and not be completely dependent on the U.S. economy is a good one. But international investing carries some risks.
● Many countries can be dangerous places to invest. Shareholder rights and protections you enjoy in the United States are reduced or nonexistent in many places. Placing your money under the regulatory oversight of developing economies is risky. Some countries (such as China) have created different classes of shareholders, domestic and international, and there can be no guarantee that these classes have the same rights to the free cash flows of companies.
● You also assume currency risk. The shares and earnings in other countries are recorded in the native currency, be it pounds, yen, cedi or drams. You may have done all your homework on a company and picked a winner, yet your returns might lag due to external economic factors causing the local currency to weaken against the dollar. (Of course, a weak dollar can boost earnings generated abroad.)
● Reporting standards differ. A company listed in the United States and based here must publicly report its earnings each quarter. That's not so elsewhere. In Britain for example, this must be done only twice a year. Few nations have reporting requirements as stringent as ours. Many don't track insider buys and sells, lockups, deals with related entities, executive salaries, and dividends. Each country has its own form of Generally Accepted Accounting Principles, which aren't always easy to understand. If you lack experience with a nation's accounting standards, you're at a disadvantage.
If you're very familiar with a country and company, you may do well investing in it directly. If not, you're not out of luck. Just zero in on multinational U.S.-based companies.
McDonald's, for example, generates about 65 percent of its revenues abroad. Roughly half of Procter & Gamble's revenues comes from outside North America. It's closer to three-quarters for Exxon Mobil, and one-third for PepsiCo. Internationally focused mutual funds such as Dodge & Cox International or Oakmark International are another option worth considering.
Walgreens' growth
The Walgreen Co. pharmacy chain (NYSE: WAG) recently reported third-quarter earnings, including a 12.4 percent sales increase and earnings growth of 14.2 percent. A little more than 60 percent of sales at Walgreens stores are generated by prescriptions filled for customers.
The prescription-filling business is extremely competitive, and government reimbursement rates for seniors under a recently enacted Medicare Part D plan are low, leaving little profitability for stores that fill the orders under that plan. Fortunately, economies of scale benefit bigger players, and Walgreens is big and growing.
Meanwhile, pharmacy benefit managers such as Caremark and Medco have been growing rapidly, mostly filling prescriptions by mail order. Walgreens is developing its own benefit-management business and will be filling prescriptions for a large managed-care organization, UnitedHealth Group.
To sum up, Walgreens appears to have identified and addressed the potential threats to its business. This may allow it to continue the impressive track record of 15 percent annual sales growth and nearly 17 percent annual earnings growth it's tallied during the past 10 years. In addition, its returns on equity average nearly 20 percent, and negligible debt levels mean that returns on capital are as high.
Great companies rarely trade at bargain-basement levels, and Walgreens trades at a recent price-to-earnings ratio of 28. But keep watching, and you might pick up some shares at a fairer price.
Web of trouble
I don't remember how many shares of Webvan I bought. If I recall correctly, it was around $7 per share at the time. I watched it fall all the way to $1 before selling. I bought it on a whim, since I thought the company's premise of delivering groceries to homes was a great idea. By the time I gave the business model enough thought as to why it may or may not work, it was too late. — Shawn P., by e-mail
The Fool responds: A company's business model is well worth examining. Webvan's model involved building expensive automated warehouses to sort groceries and process orders, along with spending a lot on advertising to try to get more people to switch their grocery shopping from supermarkets to an online company. Many of its customers gave rave reviews to the service, but there weren't enough such customers. Webvan failed to generate the revenues and earnings it needed to keep afloat. The stock was trading for mere pennies per share when the company filed for bankruptcy protection in 2001.
Name that company
Not many people know my name, which sounds like a science class. But I'm a $4.5 billion company and the world's leading provider of cleaning, sanitizing, pest-elimination, maintenance and repair products and services for the hospitality, food service, institutional and industrial markets. Based in St. Paul, Minn., and operating in more than 70 nations, I hold more than 4,000 patents. I was born in 1923, when former auto dealer Merritt J. Osborn developed Absorbit, which cleaned carpets on the spot. In 2005, Forbes named me one of America's "Best-Managed Companies," and IR magazine noted my excellent corporate governance. Who am I?
Last week's trivia answer
With my annual sales topping $3 billion, I'm one of the top producers, distributors and marketers of food and pet products for America. My brand names include Contadina, StarKist, S&W, College Inn, 9 Lives, Meow Mix, Kibbles 'n Bits, Pup-Peroni, Snausages, Pounce and Meaty Bone. You'll find my products in just about every food store and in eight out of 10 U.S. households. I was selling canned peaches in 1892. Today I offer everything from apricots to zucchini, and my brands are No. 1 in the fruit, vegetable and tomato products segments. Who am I? (Answer: Del Monte Foods)