Times Leader 06-17-2012

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SUNDAY, JUNE 17, 2012

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THE TIMES LEADER

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The Motley Fool

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Deciphering Fund Types

What are “fixed income� and “equity income� mutual funds? — P.T., Kankakee, Ill. When you see the term “fixed income,� think bonds. That’s because most bonds have fixed interest rates, letting you know exactly what kind of income they will offer you. Meanwhile, “equity� funds focus on stocks, and “equity income� funds will likely hold stocks that pay relatively high dividends, aiming to provide investors with regular streams of income. This is different from growth or value funds, which invest in companies whose stock is expected to advance, regardless of whether the companies even pay a dividend. Many fast-growing companies don’t pay any dividends, as they prefer to funnel most of their income into fueling their growth. Mutual funds that focus on income are generally best suited to those who need regular distributions of cash, such as people in retirement. However, even retirees might remain invested in some other funds or stocks, simply selling off a portion each year to generate the income they need. Research funds at Morningstar. com and learn about promising ones via our “Rule Your Retirement� newsletter, which you can try for free at fool.com/shop/newsletters. *** I own a few stocks. One has lost value, one is about the same after several years, and some have done well. I need to pay my son’s college tuition soon, so which stocks should I sell? — S.F., Norwich, Conn. First, forget how the stocks have done in the past. What matters is each company’s future. Try ranking them by how much confidence you have in their health and growth prospects. Sell the ones in which you have the least faith. Your money should always be concentrated on your best ideas.

To Educate, Amuse & Enrich

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Insiders and Institutions If you’re studying a small company in order to decide whether to invest in it, it’s good to find out whether insiders or institutions own many shares. Insider holdings are generally a good thing. If employees own a chunk of a company, they have an incentive to make it succeed. Insiders buying shares is also promising, as they must expect the shares to rise in value. Don’t be alarmed by insider sales, though. Company stock is a major portion of many executives’ compensation, so they may occasionally sell some shares to send a kid to college or to buy a car. Still, lots of executives selling is a red flag. With small companies, we like to see insiders owning 15 percent or more — and little ownership by institutions such as mutual funds and pension funds. When promising small companies have little or no institutional ownership, it’s often because the big players are sidelined. Small firms usually have relatively few shares outstanding, and their total value is modest.

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Lucky Speculation

Meet National Oilwell Varco

Not so very long ago, I invested in a pink-sheet penny stock. It was purely speculative and purely on a recommendation in an email touting a gold-mining company. I didn’t check anything out other than the stock’s past performance. It had surged recently, and once I bought, it kept rising some more. I got scared, in spite of what looked like investor confidence, and bailed at nearly twice what I paid. Today the stock is trading for less than a 10th of what I bought it at. I was dumb and didn’t do my due diligence. Fortunately, it worked out to give me a 95 percent return over the course of 20 days — but it was a stupid purchase and just dumb luck. I learned along the way that the email promoting the company had actually been paid for by the company. — M.M., Abilene, Texas The Fool Responds: You did indeed luck out. Remember that reputable and established companies don’t send out emails hyping their own stock and urging people to buy. It’s usually best to avoid stocks trading for less than $5 per share. Do you have an embarrassing lesson learned the hard way? Boil it down to 100 words (or less) and send it to The Motley Fool c/o My Dumbest Investment. Got one that worked? Submit to My Smartest Investment. If we print yours, you’ll win a Fool’s cap!

Name That Company

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Got a question for the Fool? Send it in — see Write to Us

Imagine Scruffy’s Chicken Shack (ticker: BUKBUK), with just 10 million shares outstanding, valued at $10 each. (Total market value: $100 million.) Institutions that might typically buy $10 million worth of shares can’t do so with Scruffy’s without buying fully 10 percent of the entire company, something they’re often prohibited from doing. Those of us who discover Scruffy’s early and buy shares before Wall Street does stand to benefit. Once Wall Street gets involved and institutions begin buying lots of shares, high demand will boost the stock price — and the wealth of existing shareholders. Discovering a small but growing company with significant insider ownership and low institutional ownership is a promising scenario. The company should be sound, though, with growing sales and earnings and a strong competitive position, among other things. You can call any public company and ask its investor relations department about insider and institutional ownership. Or look them up online, at sites such as finance.yahoo.com. Just remember that small companies can be volatile and are often best for investors with some experience.

Though its history goes back to 1841, you probably haven’t heard of National Oilwell Varco (NYSE: NOV). Still, you might want to invest in it. With a market cap of nearly $30 billion, the company, which specializes in equipment and supplies for oil and gas exploration and production, is bigger than General Mills or Dell. Its recent quarterly report featured revenue of $4.3 billion, up 37 percent over year-ago levels, and net income up 49 percent. Rig technology revenue grew nearly 41 percent, and the segment’s backlog of orders now tops $10 billion. The company’s strengths include a diverse product line, growing oilfieldequipment demand and a healthy balance sheet, with billions in cash and little debt. Great opportunity for the company lies in deepwater drilling and shale drilling, and it is benefiting from shorter construction cycles in Asian shipyards. In addition, several major oil companies have discovered large new reserves and will be investing billion of dollars on new drilling rigs. Already, National Oilwell Varco’s equipment sits on some 90 percent of the world’s oil rigs. There are risks, too, of course. For example, if natural gas prices stay low or fall further, it might not be worth spending a lot of money drilling for it in difficult locations. With a low P/E ratio and steep growth rates, the stock looks attractive.

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Know the answer? Send it to us with Foolish Trivia on the top and you’ll be entered into a drawing for a nifty prize!

WritetotoUs! us! Send Send questions Dumbest (or(or Smartest) Write questionsfor forAsk Askthe theFool, Fool, Dumbest Investments (up to 100 words) your trivia entries to Fool@fool.com Smartest) Investments (up toand 100 words), and your Trivia entries or via regular mail to The Fool,mail Foolish 2000 Dukeattn: St., Alexto Fool@fool.com or Motley via regular c/o Trivia, this newspaper, The andria, VA 22314. Sorry, we can’t provide individual financial advice.

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