Insight and analysis about stocks to help investors stay informed.
ASK THE FOOL
Funds, stocks and diversification
Q: If I’m invested in mutual funds, do I need to invest in some individual stocks, too, to diversify further?
A: Mutual funds alone can provide plenty of diversification — especially if they’re broad-market index funds. An S&P 500 index fund, for example, spreads its shareholders’ money across all (or a representative sample of the) 500 stocks in the S&P 500 index, from Apple to Zions Bancorporation. (If you’re invested only in funds focused on one or two regions or sectors, though, such as Asia or biotechnology, you’re not sufficiently diversified.)
The main reason you’d add individual stocks to your mix is to try to improve your portfolio’s overall performance. If one stock among 200 in a mutual fund doubles in value, it might not make too big a difference to your bottom line. But if you invest 5 percent of your money in Scruffy’s Chicken Shack (ticker: BUKBUK) and it doubles, your portfolio’s value will increase by 5 percent.
Studying stocks and deciding which ones to buy (and sell) and when takes skill, though. If you don’t have the time or interest, just stick with low-cost, broad-market index funds that track the stock market’s performance.
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Q: What does it mean when an investor “takes profits”?
A: It’s when they sell a holding that has appreciated in value. Imagine, for example, that you own shares in Buzzy’s Broccoli Beer (ticker: BRRRP), and the share price has risen 30 percent since you bought them. That’s great, but it’s just a “paper” gain that will be higher or lower in a day or two. When you sell, you “realize” the gain, taking your profits.
MY DUMBEST INVESTMENT
Out of ink
Dear Fool: So far, my biggest mistake has been doubling down on 3D printing stocks. I bought into Stratasys, ExOne and 3D Systems in mid-2014, a little before the big drop began.
After one was accused of misleading investors in its financial statements and the stock dropped 30 percent, dragging down the others with it, I bought more of each, thinking they would bounce back. But then another company announced disappointing earnings and dropped 25 percent, dragging down the others with it.
I bought in again, thinking the deal was too good to pass up.
Each stock has been repeatedly disappointing. I keep waiting for the industry to begin to deliver value instead of hype, but it will be a long climb before I can come close to breaking even for any of these picks.
The Fool responds: 3D printing is a prime example of a new technology that got lots of investors excited and hopeful, with many buying shares well before there was established and substantial consumer demand — not to mention dependable profitability.
While some have soured on the industry at this point, others see it as simply being still early in the game, and expect future profitability from 3D printing in the health care realm, among others.
Whenever you think about doubling down on a fallen stock, it’s smart to first do a lot of research confirming the likelihood of a rebound.
THE MOTLEY FOOL TAKE
Stiff competition and overcapacity in some of its markets have recently been holding back JetBlue Airways’ (Nasdaq: JBLU) unit revenue growth. Revenue per available seat mile (RASM) rose just 2 percent in the first nine months of 2018, while JetBlue’s average fuel price shot up 34 percent.
This has shrunk both profit margins and expected earnings.
The outlook for 2019, though, is better. First, JetBlue has eliminated a variety of underperforming flights, redeploying that capacity into its most profitable markets. The company has also increased its bag fees and some other fees, which are starting to have a positive impact, with RASM expected to rise 2.4 percent in the fourth quarter.
Meanwhile, cost trends are set to change dramatically in 2019. The market price of jet fuel has plunged about 25 percent in recent months, and JetBlue is planning to add seats to each of its A320s.
It has reduced staffing needs by upgrading airport kiosks, too. Thus, JetBlue’s profit margin could improve significantly this year. Further refinement of its route network, additional cost savings and the introduction of a “basic economy” seating class could boost profit margin further in 2020.
JetBlue is poised to keep growing its earnings beyond 2020. Its stock may not be a screaming bargain, but it’s appealingly priced for long-term believers and at least deserves consideration for your watch list.
(The Motley Fool has recommended JetBlue Airways.)