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Look before you buy LEAPS

Q: What are LEAPS?

A: Long Term Equity Anticipation Securities (LEAPS) are long-term options. Standard options let you purchase the right to buy (via “call” options) or sell (via “put” options) a fixed number of shares of a stock at a fixed price within a fixed time period, typically a few months. LEAPS work the same way but expire after more than a year.

For example, if you think that PieMart (ticker: GOBBL), trading at $50 today, will soon be at $70, you might buy call options for $6 per share that let you buy the shares at $55. That will ultimately cost you $61 per share ($55 plus $6), netting you a $9-per-share profit — but only if the stock hits your target before the expiration date.

LEAPS, with their longer time frames, generally cost more than shorter-term options, but they can be more attractive as they give the underlying stock more time to move.

Options are not for beginning investors, and many experienced investors steer clear, too. Learn more at investopedia.com/university/options.

Q: Are companies with lots of cash and no debt the best ones to invest in?

A: Lots of cash does allow a company to take advantage of opportunities that arise, but too much cash can be unproductive and, arguably, even wasteful.

Many successful companies will often keep small cash balances. They spend their cash for purposes such as paying dividends, expanding their businesses and acquiring other companies. If they suddenly need cash, they draw on their lines of credit.

Meanwhile, a manageable amount of debt isn’t necessarily bad. Indeed, if a company borrowed at a low rate and made great use of that money, it’s an effective strategy.

Great concepts aren’t enough

Dear Fool: My dumbest investment was in Solomon Technologies, a company making innovative electric motors. It was an exciting concept, but I lost all the money I invested.

The Fool responds: When investing, an exciting concept isn’t enough. A company should ideally offer growing revenue and profits, a healthy balance sheet (meaning little debt and ample cash to meet obligations and fuel growth), one or more sustainable competitive advantages, and trustworthy, capable management.

In the case of Solomon Technologies, its visionary CEO ended up accused by the Securities and Exchange Commission (SEC) of defrauding investors through illegal trading. He subsequently left the company.

It’s always smart to research a company thoroughly before investing, but you can still end up burned on occasion. That’s why it’s important not to invest too many eggs in too few baskets. If your Solomon stake made up half your overall portfolio’s value, it would have been devastating, but if it was just a 10th or 20th of it, it would sting less. Many times, exciting companies you run across have not yet grown into profit-making enterprises and are worth avoiding.

In one of Solomon’s filings with the SEC, it noted, “We have never been profitable, and if we continue to lose money and do not achieve profitability soon, we may be unable to continue our business.” It also noted unpaid taxes and debts.

Toying with profits

It might be game over for toy retailer Toys R Us, which is undergoing liquidation as its business evaporates, but that doesn’t mean that toy and game giant Hasbro (Nasdaq: HAS) is doomed, even though its stock is being dragged down by the news.

Hasbro has multiple channels through which to sell its games and toys, and Toys R Us wasn’t the company’s biggest retailer. In 2017, Walmart, Toys R Us and Target were its three largest customers, accounting for 19 percent, 9 percent and 9 percent of global sales, respectively.

Tie-ins with movies are one of many ways Hasbro is growing, thanks to the enduring popularity of franchises such as Star Wars, Transformers and Marvel superheroes, not to mention Hasbro’s continuing relationship with Disney.

Meanwhile, Hasbro’s rivals are weakening. Mattel’s revenue has been shrinking over the past few years, and Hasbro is looking to acquire it.

Hasbro has a track record of developing products that kids can relate to, and with its growing presence in the digital market, Hasbro ought to be able to capitalize on kids seeking online entertainment.

Its brands include Nerf, My Little Pony, Transformers, Play-Doh, Monopoly and Magic: The Gathering.

Recently trading near 52-week lows and sporting a 3 percent dividend yield, Hasbro’s stock is worth considering. (The Motley Fool owns shares of and has recommended Hasbro.)