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Researching a company

Ask the Fool

Published: November 21, 2023

Q. How should I research a company? -- G.L., Casper, Wyoming
A. Start with the company itself. Click through its website to learn more about what it does. In the site's area for investors, you may find financial filings, annual reports, conference call transcripts, presentations, fact sheets, sustainability reports and other items of interest.
Also, search for news reports and articles online; focus especially on sources you trust, such as major news outlets. Read up on the company's competitors and industry, too. Even Wikipedia can be informative (though not always entirely accurate).
Q. What are derivatives? -- L.R., Middletown, Connecticut
A. A derivative is a security created by a contract between two or more parties; its value is "derived" from the value of something else -- perhaps stocks, stock indexes, interest rates, commodities or currencies. Some derivatives are relatively straightforward, such as stock options. With a basic "call" option, you buy the right to buy a certain stock at a certain price over a certain period. The option's value depends on the (fluctuating) value of the stock it's tied to.
Other kinds of derivatives include forwards, futures, swaps, mortgage-backed securities, collateralized debt obligations and credit default swaps.
Derivatives also often incorporate debt, which can amplify their gains -- and their losses. Derivatives can be used for managing risk (such as via hedging), or for pure speculation. Some can be quite risky. Many derivatives are not regulated and bear the risk of one of the parties defaulting.
Warren Buffett has said, "The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen)" and "derivatives are financial weapons of mass destruction."
Fool's School
Is Your Home Sufficiently Insured?
Unless you're so rich that it won't affect you much if your home burns down or is blown away by a tornado, you'll need to carry homeowner's insurance. It's important to buy enough coverage, so here are some considerations:
Be sure to get replacement-value coverage: If you need it, it will pay for your home to be entirely rebuilt. It's a mistake to focus your coverage on the home's market value, as that may be far from what it would cost to rebuild it. Check every couple of years that your coverage is still sufficient, because building material prices may have soared. Also consider getting replacement cost coverage that's "extended," which will pay up to a certain percentage above the amount you're covered for if needed, or "guaranteed," which will cover the entire cost.
Not only will you want to be able to rebuild your home, but you'll also want to cover possessions in the home. When you add those up, they're probably worth a lot. Again, focus on replacement-value coverage, because some items may not be worth much if you've owned them for a decade, but replacing them could be costly. Taking the time to inventory and photograph your belongings can be important.
If you have a lot of a specific kind of valuable, such as jewelry or collectibles, ask whether you need extra coverage for them, as many regular homeowner's insurance policies limit the amounts covered.
Liability coverage is also important to protect you if, for example, someone is hurt on your property and sues. A minimum of $500,000 in liability coverage is often recommended; if your net worth is high, increase that, because you have a lot more to lose.
When you shop around for homeowner's insurance, see what additional coverage might be available -- such as covering the cost of a rental while your home is being rebuilt.
Note that even if you rent, you should carry insurance to protect your belongings from fire, storm damage, theft and other kinds of loss.
My Dumbest Investment
Broke Even
One of my most regrettable investment moves was many years ago, when I sold my shares of Netflix. I've long been a long-term, buy-and-hold investor, and I still am. But after getting into Netflix early, for around $12 per share, I watched the stock go down. I felt that the company was good, but I still sold my shares as soon as they rose again, breaking even. Hmm, where is Netflix trading at now? -- T.D., online
The Fool responds: We're afraid to answer that last question!
Netflix had its initial public offering (IPO) in May 2002, with shares debuting on the open market priced at $15 apiece. If you bought, say, 100 shares soon after that, when the shares dipped to $12 apiece, you'd have spent $1,200, plus a trading commission.
If you'd hung on to the shares until now, you'd have seen your shares double in number to 200 after a 2-for-1 stock split in 2004 and then grow to 1,400 in 2015 after a 7-for-1 split. (Remember that stock splits increase the number of shares you own while decreasing their price proportionately -- they don't really change the total value of your shares.) At a recent (mid-September) share price near $400, your Netflix stock would be worth around $560,000. And that's down from the stock's high of about $690 in late 2021, when 1,400 shares would have been worth almost $1 million.
Foolish Trivia
Name That Company
I trace my roots back to 1898, when my co-founder borrowed $3,500 for a down payment on a factory in Akron, Ohio. I'm named after the discoverer of the rubber vulcanization process. My logo, a body part of the Roman god Mercury, debuted in 1901. My early products included carriage and bicycle tires, horseshoe pads, tubes for pharmaceutical bottles -- and automobile tires. Today, with a recent market capitalization around $3.4 billion, I'm one of the world's largest tire manufacturers. I employ about 74,000 people and bring in more than $20 billion in sales annually. Who am I?
Last Week's Trivia Answer
Tracing my roots back to 1894, I'm America's oldest branded poultry company. I began on a family farm in New Jersey and was incorporated in 1927 with the name you might know me by. In 1998, I started raising antibiotic-free birds with all-natural feed. In 2005, I debuted gluten-free nuggets and tenders, and in 2017, I opened the world's first organic-certified chicken hatchery focused on animal welfare. By 2000, I employed more than 700 people and worked with more than 90 farm families. Today, headquartered in Fredericksburg, Pennsylvania, I'm a fifth-generation family business now owned by Sechler Family Foods. Who am I? (Answer: Bell & Evans)
The Motley Fool Take
A Long-Term Winner
For several years, shares of Amazon.com (Nasdaq: AMZN) seemed overvalued, based on metrics like the price-to-sales (P/S) ratio. But more recently, Amazon's P/S has fallen well below its five-year average. So if not necessarily a bargain, the stock now seems reasonably valued for long-term investors.
Anyone worrying about slowing sales growth at Amazon may be underappreciating the company's long-term potential. It reported sales growth of 11% year over year in the second quarter, which isn't bad for a company with annual revenue topping $500 billion.
Amazon's physical stores have been growing more rapidly than its online business. But its online business can grow faster as the broader e-commerce market recovers. Improving inventory management and speeding up logistics will lead to faster delivery, more satisfied customers and better profit performance.
Online shopping only makes up 15.4% of all retail spending in this country, per recent data from the St. Louis Federal Reserve, so there's plenty of room for Amazon to grow its e-commerce business further.
Amazon's shares might go up or down in the coming year or so, but over the long run, they're likely to keep growing robustly. (The Motley Fool owns shares of Amazon.com and has recommended it.)