Q: With a company’s “anticipated” quarterly earnings, who is doing the anticipating?
A: Earnings estimates usually reflect the consensus of Wall Street analysts who have often received guidance from the companies themselves.
Information on earnings expectations can help investors estimate a company’s fair value. But given that they’re really just short-term guesses, they get too much attention. Also, since a company’s stock can get punished upon disappointing earnings, managements may undershoot their guidance.
For long-term investors, how a company will perform over the coming years or decades is most important, not what analysts expect will happen in the next three to 12 months. If you’re aiming to hold on to a great company for a decade or more, the two numbers that will determine your ultimate gain are the price you bought at and the price you sold at, not the stock’s price every three months.
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Q: What can I read to learn more about financial planning?
A: Try “Ernst & Young’s Personal Financial Planning Guide” (Wiley), which is available online, in used or digital form. Eric Tyson’s “Personal Finance for Dummies” (For Dummies, $23) and Jonathan Clements’ “Jonathan Clements Money Guide 2015” (CreateSpace, $16) are also informative.
Not such a gold mine
Dear Fool: My dumbest investment was in Golconda Resources. Yes, I invested in a gold mine! The company was mining for diamonds, too, and also entered into a deal involving drilling for oil. The stock has been useful to me because I can sell off pieces of my position in it to offset gains at tax time. I’m still holding on to my dream!
The Fool responds: Ouch. Golconda is very much a penny stock, with shares worth less than a penny apiece the last time they traded. It has likely given you a total loss, so you should stop holding on to that dream.
You’re right to point out the consolation prize that a terrible investment offers: the chance to offset taxable capital gains with your capital losses.
In other words, if you’re sitting on $10,000 in losses and you have $5,000 in taxable capital gains this year from appreciated stocks that you sold, you can sell enough shares of your loser so that you have a $5,000 loss. That can wipe out your gain, sparing you the taxes on that gain.
If you recognize a $10,000 loss and have only a $5,000 gain, you can take up to $3,000 as a deduction against your taxable income and then carry over the remaining $2,000 loss to the next year, to offset other gains or to serve as another deduction. It’s better than nothing.
Searching for profits
If you’re looking for an undervalued fast-grower and you can handle some risk, give some consideration to the Chinese search engine giant Baidu (Nasdaq: BIDU). Its stock has fallen some 30 percent over the past year, partly due to concerns over China’s slowing economy, but there’s much to like about the company.
Baidu evolved from a simple search engine into an ecosystem of portals, cloud apps and mobile services, and is investing in many growth initiatives, such as an “O2O” (online-to-offline) platform to let users order products and services directly from its mobile app. Its investments are shrinking its profit margins and earnings in the near term, but can pay off handsomely in the future for patient investors. (Baidu’s once worrisome investments in mobile technology have paid off well, with more than half of its revenue now mobile-based.)
Baidu’s future seems quite promising. While Internet penetration in the U.S. is already hovering near 85 percent, it’s roughly half of that in China. There are literally hundreds of millions of Chinese consumers coming online — many of them via mobile devices.
Meanwhile, Baidu offers user-generated content, social-networking products, security products, online marketing products, video streaming and a patient-doctor booking service, among other things. It’s expected to debut driverless cars by the end of this year. (The Motley Fool owns shares of and has recommended Baidu.)