Q: The stock market rises and falls as stocks are bought and sold — but just who is doing all that buying and selling?
A: Many buyers and sellers are individual investors like us, placing small trade orders through our brokerages. There are also big institutional investors, such as mutual funds, pension funds, banks and insurance companies. And in recent years, high-frequency trading companies placing gobs of automated orders account for as much as half of the market’s activity.
Stock prices fluctuate due to supply and demand. If a stock is in great demand, its price will rise. If it falls out of favor, there will be lots of sellers, and the price will keep falling until it hits levels at which there are buyers.
We small investors have a bit of an edge if we discover a small gem and invest in it early.
Most Read Business Stories
- U.S. home-price growth decelerates for first time since 2021, including Seattle's
- Sticker shock? Here's how to find a cheap(er) flight this summer
- Abandoned Boeing 747 to be auctioned off
- Amid attacks and thefts, some retail workers want to fight back
- Seattle startup says it's close to cracking nuclear fusion; some experts say otherwise
When institutions eventually start buying in their usual huge quantities (they often can’t get too involved with very small companies), they’ll drive its price up, benefiting smaller, earlier investors.
Q: What does it mean if a stock is “trading below cash”?
A: It means the company’s cash exceeds its entire market value — i.e., it has more cash per share than its share price. That can make many investors see it as a bargain. Others, though, see it as a possible sign of trouble.
For example, the company may have lots of cash, yet burn through it faster than it’s coming in. It can be worthwhile to look for healthy, growing companies with lots of cash and appealing valuations. They just don’t need to be trading below cash.
Dear Fool: Years ago, I was young and aggressive and had a newly minted master’s degree in supply-chain management. I learned of a new tech company called Webvan that was doing residential grocery delivery using cutting-edge logistics. With a cocky “I know this biz!” attitude, I dropped $5,000 into its stock.
I should have gone to Vegas instead, and thrown it all on black. The stock went up and up and then down hard in a thud, all the way to bankruptcy. Thankfully, I’ve learned a few things from it.
The Fool responds: Ouch. Lots of companies imploded when the internet bubble burst in 2000 — including Webvan. Many were simply way overvalued, having been bid up during a market frenzy. But others, such as Webvan, had other problems.
For starters, Webvan wasn’t clear how much demand there was in those years for delivered groceries. It assumed lots of demand and, with hundreds of millions of dollars in funding, placed a billion-dollar construction order for multiple warehouses with Bechtel.
That sounds promising, but it cost Webvan $27 to deliver each order, and at one point, despite its $6 billion market value, its annual revenue was only $5 million. Webvan went bankrupt.
A key lesson here is that exciting products or services aren’t enough. A company needs to have a clearly defined path to profitability.
A baby-boomer business
HCP (NYSE: HCP) is a real estate investment trust (REIT) that owns and manages health-care properties — particularly senior housing, life-science facilities and medical offices. Over the past year and a half or so, HCP has been executing a transformation plan — spinning off its riskiest assets, paying down debt and reducing its reliance on its largest tenants — and as a result, the company is leaner and more focused, with excellent asset quality. Indeed, Standard & Poor’s recently upped its credit rating for the company, citing a “positive outlook.”
The ongoing retirement of the baby-boomer generation is forecast to cause a surge in senior citizens, and HCP is now well positioned to take advantage of the expected growth in senior-focused health care over the coming decades.
Between 2020 and 2030, the 65-and-older cohort of Americans is expected to grow by about 30 percent, topping 70 million people. More older Americans means more demand for senior housing and medical facilities.
HCP was the first health- care REIT added to the S&P 500 index. It’s a high-yield dividend stock, recently yielding 5.5 percent, and it has a reasonable payout ratio for its industry.
With demographic trends on its side, HCP is investing in high-quality health-care properties, growing responsibly, and generating a predictable and increasing income stream for shareholders. It looks like a stock you could hold for a long time.