The Motley Fool offers tips on investing, and explains the terms common stock and "activist investors."

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ASK THE FOOL

Common stock and activist investors

Q: What’s “common stock”?

A: It’s probably what you have in your stock portfolio. A share of stock is a share of a company — meaning each shareholder is literally a part-owner of the enterprise, with a stake in its earnings. Those earnings can reward shareholders in various ways: They can be paid out in dividends or reinvested in the business, helping it grow. Holders of common stock also usually get to vote on company matters and elect the board of directors.

Another type of stock you might encounter is “preferred stock.” Holders of preferred shares typically do not vote on company matters, but do have first dibs on any dividends paid and higher priority on corporate assets if the company goes out of business.

Q: Can you explain what activist investors do?

A: Sure. Activist investors buy many shares of a company’s stock in order to wield influence with it, sometimes even getting onto its board of directors. They typically target big companies that they view as inefficient, and they push for changes such as significant cost-cutting, replacing top managers, taking the company private, splitting up the company or spending heavily on dividends or share buybacks.

As an example, JANA Partners LLC bought up more than 8 percent of Whole Foods Market stock and pushed for the company to be acquired by Amazon.com, profiting in the process as the stock price rose.

Well-known activist Carl Icahn objected to Dell Technologies’ plan to go public until the deal was sweetened, and he has also pushed Apple to repurchase more shares. Activist investors are often heads of hedge funds or private equity companies.

MY DUMBEST INVESTMENT

Dividends and P/E ratios

Dear Fool: Many years ago, I got excited about a company when it introduced an impressive new electronic storage device.

I bought shares at $15 apiece as a long-term investment, planning to sell only if or when it went above $30. Well, it split 2-for-1 and then the stock price plunged, only to linger around $3 per share.

When the annual report arrived, I read about generous stock options for management and employees and found only one sentence about dividends, essentially saying that the company had never paid any and probably never would.

I sold my shares, roughly breaking even — but I consider that a loss, as I could have done better even in a money market account. I learned that a stock’s dividend is more important than its price-to-earnings (P/E) ratio.

The Fool responds: Those two factors are apples and oranges. A dividend is one way that a company can reward shareholders — by directly sending them cash. Investing in healthy and growing dividend payers can be very profitable, but you can do very well with nonpayers, too, if their stock appreciates at a good clip.

Meanwhile, a P/E ratio is simply a measure that can help you determine whether a stock is under- or overvalued. If you like the idea of regular income, seek attractive dividend-paying stocks — but aim to buy them when they’re undervalued. Both dividends and P/E ratios can be important.

THE MOTLEY FOOL TAKE

A cancer-fighting biotech company

It’s rare to find rapid growth coupled with a relatively low valuation in the biotech industry, but that’s what you get with cancer-drug developer Exelixis (Nasdaq: EXEL). Its lead drug, Cabometyx, approved to treat renal cell carcinoma (the most common form of kidney cancer), has turned it into a cash cow for the foreseeable future. (Exelixis’ most recent quarterly report featured net product sales growth of 69 percent, driven almost entirely by Cabometyx.) The drug is also expected (but not guaranteed) to win approval to treat advanced hepatocellular carcinoma, the most common form of liver cancer, next year.

With strong pricing power for Cabometyx, Exelixis may collect $1 billion annually from the drug by 2021.

Biotech stocks can be risky, as many of their drugs in development end up failing to win approval from the Food and Drug Administration. It helps when the company has one or more drugs already on the market, as Exelixis does. In its third quarter, Exelixis posted year-over-year growth of more than 50 percent for both earnings and income from operations.

Exelixis does face competition, but it’s expected by some (though not guaranteed) to grow by 30 percent annually through 2021, and its price-to-earnings (P/E) ratio was recently in the teens. If you can stomach some volatility and risk, consider Exelixis for your long-term portfolio. (The Motley Fool has recommended and owns shares of Exelixis.)