Companies and their stock prices
Q: Do companies want their stock prices to be high?
A: In general, yes. But understand that when people buy shares of a company’s stock, those proceeds go to whoever sold the shares, not to the company.
Companies collect their money when their shares are first issued — via an “initial public offering” (IPO). Those shares then trade between investors in the stock market. When you buy shares of, say, Hershey through your brokerage, you’re buying from an investor who wants to sell. (Think of baseball cards: The companies printing them are paid when the cards are first sold; after that they’re traded between owners, with their value rising or falling.)
If Hershey’s stock price falls significantly, so will its market value, and a competitor might try to buy it. Also, low stock prices limit a company’s flexibility. When Hershey’s stock price is high, if it tries to buy another company with its stock, the acquisition will require fewer shares. And if Hershey wants to raise cash by issuing more shares, it will get more for each share when the price is high.
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Q: What are “diluted” shares?
A: On an income statement, you’ll see a company’s bottom-line profit, or “net income,” divided by total share count to arrive at earnings per share (EPS). The EPS is sometimes reported in two ways: “basic” and “diluted.” Basic EPS uses the number of shares that currently exist, while diluted EPS includes shares that could possibly exist, such as if people with stock options exercised them. Other securities that could be converted into common stock are also accounted for. Focus on diluted, not basic, numbers.
Dear Fool: I made my smartest investment between 1999 and 2001, in the middle of the dot-com bust, when I concluded that Pixar Animation Studios was one of the best companies on the planet. I loved its movies so much that I became hooked, bought shares and started attending shareholder meetings.
In the early 2000s, when the market started to look a little grim, I moved 70 percent of my assets into Pixar — so much for diversification. But if you’d had the joy of attending annual meetings hosted by Steve Jobs, John Lasseter and Ed Catmull, you’d know why I felt comfortable doing so. In 2006, Disney acquired Pixar for $7.4 billion, exchanging 2.3 shares of Disney for each share of Pixar. I was feeling pretty great, and my portfolio had increased in value severalfold.
The Fool responds: You did well, but it’s rarely a good move to put 70 percent of your eggs in one basket, as even respected and seemingly successful companies can turn into major disappointments. To reduce risk, spread your money across at least 12 to 15 or so stocks.
The purchase of Pixar has paid off handsomely for Disney, with more than a dozen Pixar movies generating more than $13 billion at the box office and still netting the company billions of dollars after production costs are subtracted. (Hits include “Finding Dory,” “Ratatouille,” “Incredibles 2,” “Brave,” “Up,” “Inside Out,” “Toy Story 3” and “Coco.”)
Machine-vision specialist Cognex (Nasdaq: CGNX) is a much-admired growth company with significant exposure to many long-term growth trends in automation and robotics. With its shares recently down about 34 percent from their 52-week high, the stock is worth considering for your long-term portfolio.
Retailers expanding their e-commerce operations will need to invest in automation, and Cognex specializes in making machine-vision systems used to automate factories, warehouses and distribution centers. Meanwhile, more manufacturers are investing in robotics and automation, and the growth of “smart” and connected home and business products is only going to increase this trend.
Cognex’s logistics revenue was recently growing at a 50 percent year-over-year rate, and management believes it can sustain that rate for many years. Cognex management expects an overall revenue growth rate near 20 percent annually over the long term.
Unfortunately, Cognex also faces some headwinds, such as delays in capital spending from its display and smartphone customers and a general slowing of spending from China. Those factors may keep its stock depressed in the near term — presenting an attractive entry point for investors who like its solid long-term prospects. (The Motley Fool owns shares of and has recommended Cognex.)