Share story

ASK THE FOOL

Just divide by 0.14748071991788

Q: The Dow was recently at 25,600. What, exactly, does that number represent?

A: “The Dow” refers to the Dow Jones industrial average, a U.S. stock-market index established in 1896. It’s an average of the stock prices of 30 companies that include Apple, Boeing, Coca-Cola, The Home Depot, McDonald’s, Nike, Procter & Gamble, Walmart and Visa. It doesn’t look like an average, though, when it’s 25,600 and many of the stocks sport prices below $100.

It makes sense, though, because the shares, on average, actually would trade at lofty levels — if they had never been split, issued dividends or undergone major changes such as spin offs or mergers during their time in the index.

Therefore, in order to account for all those changes, the stock prices of the 30 component stocks are added together and then divided by the “divisor” (which is adjusted frequently and was recently 0.14748071991788). To understand how each stock affects the average, know that if, say, Visa stock rises by $10, you can just divide 10 by the divisor and learn that the Dow will rise by about 67.81 points (10 divided by 0.14748071991788 equals 67.805).

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Q: What are “orphan drugs” in the pharmaceutical world?

A: The U.S. Food & Drug Administration has an Orphan Drug Designation program, offering incentives for companies to develop drugs to treat, diagnose or prevent “rare diseases/disorders that affect fewer than 200,000 people in the U.S., or that affect more than 200,000 persons but are not expected to recover the costs of developing and marketing a treatment drug.” Since many of these drugs end up with steep prices, they can make a lot of money for biotech and pharmaceutical companies.

MY DUMBEST INVESTMENT

Short-term blues

Dear Fool: I bought shares of Novo Nordisk for around $44.50 per share, and now, about a week later, shares have fallen below $41. From my reading, I gather that they may continue to drop and not recover for years. Should I sell and take a big loss or hold on?

The Fool responds: You’re being very impatient. Stocks move up and down throughout each day and week and year. Over the long run, the stocks of healthy and growing companies should increase in value, making shareholders wealthier. But even great companies’ stocks have languished for months or even years — and terrific investments can fall in value for a while, too. A week is way too short a time in which to expect to reap a profit.

Many fortunes have been made by investing in great companies and then hanging onto the shares for many years — as long as the companies remained strong and with bright futures. If you don’t have the confidence to remain invested in individual companies, consider just socking money away in a low-fee broad-market index fund, such as one that tracks the S&P 500.

Novo Nordisk was recently trading around $47.50 per share. It’s facing pricing pressures for its diabetes drugs and investor opinions about it are mixed. Its future has promise, though, and The Motley Fool has recommended it.

THE MOTLEY FOOL TAKE

Apple appeal

Apple (Nasdaq: AAPL) recently reported its third-quarter results, in which revenue popped 17 percent year over year (marking four consecutive quarters of double-digit year-over-year growth) and earnings soared 40 percent higher.

Apple has been financially dependent on its iPhone, but it is wisely expanding its revenue in other areas. Its Services segment (which includes Apple Music, the App Store and Apple Pay) is a rising star, with its revenue up by 31 percent in the most recent quarter to $9.5 billion, representing 18 percent of the company’s top line. Clearly, Apple not only knows how to sell devices to its customers, but it can also persuade them to spend more money in the company’s ecosystem through its ever-increasing menu of services.

The company’s dividend yield was recently at 1.4 percent, and dividend investors should consider that Apple has a very low payout ratio of about 24 percent, meaning that the company has plenty of room to increase that payout. Apple is committed to its shareholders, having announced a $100 billion share repurchase program in the second quarter of 2018.

Whether you’re looking for a company with earnings, cash on the balance sheet or a wide competitive moat, Apple fits the bill.

(The Motley Fool has recommended Apple and owns shares of it as well as the following options on it: long January 2020 $150 calls and short January 2020 $155 calls.)