Earnings estimates good in short term

When I see “anticipated earnings” for a company’s upcoming quarter, who is doing the anticipating? – S.V., Springfield, Ill.

Earnings estimates usually reflect the consensus of Wall Street analysts who traditionally receive guidance from the companies themselves. Company bigwigs will frequently offer their earnings and revenue expectations for the coming quarters or years. In the past, they would often disclose such information privately to selected parties, but that’s a no-no now, thank goodness.

Information on earnings expectations can help investors estimate a company’s fair value. But given that they’re ultimately just short-term guesses, they get too much attention. Also, since company stock can get punished for 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.

What are investment “notes,” and how risky are they? – J.C., Newark, N.J.

The term “note” usually refers to an intermediate-term bond, with a life of between one and 10 years. Treasury notes, sold by the government, are the least risky. Corporate bonds are more risky. Higher-quality companies offer lower rates, while enterprises with lower credit ratings must offer higher interest rates in order to find buyers. The shakiest companies issue “junk bonds,” with the high rates.

MY DUMBEST INVESTMENT

My dumbest investment was buying into a Canadian penny stock. It seemed cheap, so I kept buying more shares. I ended up with about 25,000 shares, bought at an average price of $1 apiece.

Some friends wanted in on the stock, too, so they would buy shares every time I did. In the end, one friend had 10,000 shares and another had 7,000. One day the stock hit $7 per share, and we were feeling pretty good. A week later, it was at just $0.01. We lost all our money.

My 25,000 shares had briefly been worth $175,000, but were now just about worthless. One friend had lost $10,000 and the other $7,000. I’ve learned to follow my stocks daily and to never tell good friends about any stocks. – M.J., online

The Fool responds: It’s important to keep up with your stock holdings, but don’t let yourself obsess over their daily moves. If you invest in established, stable companies, checking in on them quarterly, when they release their earnings reports, can be enough. Steer clear of penny stocks, too they tend to be ultra-risky money-losers.

FOOLISH TRIVIA

Founded in 1876 and based in Dusseldorf, Germany, I’m a major player in three business sectors: laundry and home care, cosmetics and toiletries, and adhesives. My familiar brands include Dial, Coast and Tone soaps; Purex detergents; Soft Scrub cleaners; Right Guard and Soft & Dri antiperspirants; and Loctite and Pritt adhesives. I also offer products for professional salons and industrial purposes. My first product was a packaged washing powder, and for a period in the 1800s, 10 percent of my revenue came from tea. Today I employ roughly 48,000 people and take in about $20 billion annually. Who am I?

Last Week’s Trivia Answer: Founded in 1948, my name comes from the sound of a slingshot-propelled missile hitting its target. Today I make fun stuff such as Frisbee discs, Slip ‘N Slide water slides, Hula Hoop hoops, Boogie body boards, Snow Boogie sleds and BZ Pro Boards. I promoted my Hula Hoops heavily in 1958, and 25 million were sold over four months. In the 1960s, I sold 20 million SuperBalls, known for bouncing surprisingly high. Hacky Sacks were also a big hit. After long being independent, I was owned by Kransco and then Mattel for a while, and now Cornerstone owns me. Who am I? Answer: Wham-O

THE MOTLEY FOOL TAKE

Best Buy (NYSE: BBY) recently announced its 2010 fourth-quarter and full-year earnings, and most news coverage focused mainly on the negatives: weak TV sales; same-store sales down 4.6 percent; operating costs up; profits down 11 percent; market share a full percentage point lower.

Such negativity has sent shares downward, making them more attractive to prospective buyers.

There was some good news in the earnings reports, though. Gross profit margins were up slightly, partly due to a focus on higher-margin items such as smartphones. And looking beyond the earnings report, the company’s outlook isn’t so grim.

Some see Amazon.com killing Best Buy, but Amazon’s edge on pricing looks shaky in light of state initiatives to require it to collect sales taxes. As this playing field gets leveled, the momentum may shift in Best Buy’s favor as it capitalizes on its strengths: “boots-on-the-ground” expert advice on high-price purchases, and a local Geek Squad business that can tame tech glitches.

Best Buy shares have recently been trading at a price-to-earnings (P/E) ratio of around 9, and they offer a dividend yield of roughly 2 percent, as well. Given the company’s projected 11 percent five-year annualized earnings growth, the stock looks bargain-priced.

(Best Buy is a “Motley Fool Inside Value” choice, and the Fool owns shares of it. Amazon.com and Best Buy are “Motley Fool Stock Advisor” recommendations.)

The Motley Fool is written by Tom and David Gardner for Universal Press Syndicate. Reach the Gardners at fool@ fool.com, or by mail to Motley Fool, 1130 Walnut, Kansas City, MO 64106.