The Fool’s Take
Online services giant Alphabet is built to thrive in a variety of economic environments, thanks to its ultra-flexible umbrella organization, which allows it to expand in many industries.
If online search and advertising revenue dried up, Alphabet would rely on its Android smartphone, YouTube video platform and Google Cloud decentralized computing service in the short term. Promising side gigs such as the Waymo self-driving taxi service, Calico medical research group or Verily health care projects unit might pick up the long-term baton. Or maybe Google Cloud will just run with it instead, powered by its expertise in artificial intelligence.
The U.S. Department of Justice is reportedly considering breaking up Alphabet after multiple legal challenges. In August, a federal judge ruled that when Google paid companies like Apple and Samsung to be the default search engine on their devices, that constituted an illegal monopoly. While the idea of a breakup worries many investors, if it happens while you’re a shareholder, you’re likely to receive shares in the new, smaller companies.
Both classes of Alphabet’s stock had recent forward-looking price-to-earnings (P/E) ratios around 17 and seem attractively priced for long-term investors.
Ask the Fool
From P.T., Exeter, N.H.: A company I’m interested in seems attractively priced. What should I learn about it before investing in it?
The Fool responds: The more you know about the company, the better decisions you’ll likely make about it. Here are some things to check out:
First, make sure that it’s not a penny stock (with shares trading for less than about $5 apiece), as penny stocks are notoriously volatile and can be ultra-risky. Check to see what the company’s market capitalization is, too: A company’s “market cap” is its total number of shares times its current share price, reflecting its current total market value. Large-cap companies, those with values of $10 billion or more, will be more established and likely more stable than small- or micro-cap companies (those with values below $2 billion or $300 million, respectively).
It’s best if the company has competitive advantages, such as a strong brand, proprietary technology or economies of scale.
Review the company’s financial statements, too — specifically the quarterly “10-Q” and annual “10-K” reports. You can generally find them at sites such as Finance.Yahoo.com or SEC.gov/edgar.shtml — or at the company’s own website. Ideally, you want sales (sometimes called revenue) and income (earnings after expenses) to be growing. Heavy or quickly growing debt are red flags. The company’s statement of cash flows shows how it’s generating cash. You want to see most cash derived from ongoing operations (the making and selling of products or services), and not from issuing debt or stock, or selling property.
From B.S., Granville, Tenn.: I’m thinking of day-trading. Thumbs-up or thumbs-down?
The Fool responds: Thumbs-down. Way down.
The Fool’s School
The dollar has been fairly strong in recent years, reflecting our strong economy. (In 2022, it hit a level not seen since the early 2000s.) Don’t assume that the strength of the dollar is just an economic measure with little impact on your life, because a strong local currency can be good — or bad — for your finances. On the plus side, imported goods can become cheaper for Americans. And because American companies that buy a lot of products or raw materials abroad can also get more bang for their buck, that can result in lower costs for consumers. (That helps keep inflation in check, too.)
When the dollar is strong relative to other nations’ currencies, it’s great for Americans traveling abroad, as they’ll get more local currency for each of their dollars. On the other hand, a strong dollar can depress tourism in the U.S., as a trip to America will cost foreigners more. And a strong dollar has other drawbacks. American manufacturers can find it tough to compete with lower-priced goods from abroad. And the many American companies that sell products or services abroad can be hurt when they have to convert their foreign revenue to dollars. For example, when Coca-Cola sells its drinks abroad, it’s paid in baht, euros, francs, kroner, pesos, pounds, ringgits, riyals, rand, rupees, shekels, won, yen and yuan, among other currencies. And when it converts those currencies back to dollars, it will get fewer dollars than when the dollar is weak. That’s a big deal for those companies and their investors, as about 40% of the overall revenue of S&P 500 companies is generated abroad. The strong dollar also hurts countries importing U.S. goods, as it costs them more in their local currency. Those higher prices can hurt American exporters.
Our strong dollar has been propped up, in part, by higher interest rates; if rates fall, as expected, that could weaken it a bit. But a strong economy will continue to bolster the dollar.
My Smartest Investment
From S.F.: My best financial move was buying stocks when it felt stupid to do so.
The Fool responds: Bravo for you — buying stocks when they’re down is one of the smartest moves an investor can make. It can feel hard to do so, though, because when the stock market is down, investors are generally pessimistic. (That’s actually why the market is down — because many investors are selling shares.)
But a down market can be full of terrific companies trading at prices that are more attractive than they used to be. As Warren Buffett has advised, “Be fearful when others are greedy, and be greedy when others are fearful.” To be a great investor, you need to be able to think for yourself rationally and not just follow the crowd. Following the crowd can have you buying into popular stocks after they’ve soared — and perhaps when they’re overvalued and due to pull back for a while.
You’ll feel less stupid buying when others are selling if you take some time to learn more about investing — and contrarian investing in particular. Then the next time there’s a market pullback, you’ll feel smart, not stupid, buying stocks.
Who Am I?
I trace my roots back to 1899, when the Electric Boat Company — which I eventually acquired — was founded in New Jersey to build a 54-foot-long submersible vessel. It launched the first nuclear-powered submarine in 1954. I’ve bought (and sometimes later sold) many companies, including Bath Iron Works and Cessna Aircraft. Today, with a recent market value near $80 billion, I’m a global aerospace and defense company, with brands such as Gulfstream, Abrams and Stryker. I employ more than 100,000 people and generate nearly $45 billion in revenue annually. Who am I?
Don’t remember last week’s question? Find it here.
Last week’s answer: Deckers Brands
