Why do bond prices go up when bond yields go down? – N.P., Keene, N.H.
Bond prices react to changes in interest rates. If you buy a $1,000, 30-year bond with a 5 percent interest rate, it’ll pay you $50 per year until maturity, when you get your $1,000 back.
But if interest rates rise, that 5 percent won’t be able to compete with newer bonds’ higher rates. The value of your bond will have to drop to make it more attractive to buyers.
Someone selling that bond, then, might have to accept $950 for it instead of its original $1,000. The buyer will receive the same $50 annual payments and will receive the same $1,000 at maturity.
When interest rates drop, bond prices will rise as people will pay a premium for higher-yielding bonds.
What’s a “beneficial owner”? – H.L., South Bend, Ind.
A beneficial owner is the true owner of a security, such as a stock. If some assets are held for you in a trust through a brokerage, for example, you’re the beneficial owner.
It’s a common practice for brokerages to hold stocks in “street name” (i.e., their own name) instead of putting the shares in your name. This is routine, and the shares still belong to you. Thus, you remain the beneficial owner.
It often makes sense to leave shares in “street name” instead of having them registered to you and getting the actual certificates sent to you in the mail. That way, when you want to sell, you won’t have to find and mail back the certificates.
MY DUMBEST INVESTMENT
I’ve tried to ride the wave of major investment trends. Back in the 1990s, when “green power” was hot, I invested in a company that aimed to make pesticides unnecessary. I lost most of my money. I then turned to an “Asian tiger” and invested in Malaysia, losing $5,000. I switched to China and lost $3,000 there. Thinking real estate would restore my fortune, I bought a real estate investment trust and lost another $3,000. Could I be doing something wrong? – J.W., via email
The Fool responds: You have to be very patient for some trends to pay off. Environmentalism and alternative energies, for example, have been growing for many years and still seem to have a lot of room to run. Likewise, China and other developing economies are experiencing strong growth, but their returns for investors may stall or stumble now and then.
It’s also important to pick the right horses in each race, which can be especially hard early on. It’s sometimes best to wait, or to diversify with a variety of companies in a particular niche, perhaps via a mutual fund.
I trace my history and management back to Wilbur and Orville. I’m the product of a 1929 merger of 12 companies. One of them was the world’s largest aviation company during World War I, churning out 10,000 aircraft during it. In 1927, one of my newfangled air-cooled engines performed well in Charles Lindbergh’s famous “Spirit of St. Louis” flight. In the 1950s, I pioneered the development of flight simulators for military and commercial aircraft. Today I specialize in motion control, flow control, and metal treatment technologies for industries such as defense, commercial aerospace and energy. Who am I?
Last Week’s Trivia Answer: Based in New York, I rake in more than $30 billion annually via cable network programming, filmed entertainment, television, direct broadcast satellite television, publishing, and more. My brands include Twentieth Century Fox, The Wall Street Journal, Fox News, British Sky Broadcasting, FX, SPEED, FUEL TV, Big Ten Network, HarperCollins, Dow Jones Newswires, Barron’s, MarketWatch, SmartMoney, New York Post, The Times, and scores of newspapers and TV stations. I also own big chunks of National Geographic channel and Hulu and many media properties around the world. I bring you “Glee,” “Modern Family” and “American Idol.” Who am I? Answer: News Corp.
THE MOTLEY FOOL TAKE
Google (Nasdaq: GOOG) is looking to get a little better return on its cash – by creating a $280 million fund with which SolarCity can expand its residential leasing program.
SolarCity is a full-service solar energy company providing design, financing, installation and monitoring for solar systems. Google’s money will be used to finance residential projects instead of homeowners paying for entire installations themselves. SolarCity has set up 15 such funds with various partners, totaling $1.28 billion.
Google, laden with cash, has been looking for ways to expand its “Do no evil” mantra with renewable energy. The company is invested in building a $5 billion wind-power transmission corridor off the Atlantic coast and wind farms in North Dakota, and it has also made investments in thermal solar company BrightSource Energy.
Solar manufacturers should cheer anything that helps make solar power more accessible in the U.S. market. Established higher-efficiency companies such as SunPower, Trina Solar, and Yingli Green Energy in particular should benefit.
Google is slowly turning itself into a major funding source for renewable energy companies. In time, that may become a major source of income for the company. (The Motley Fool owns shares of Google, and Motley Fool newsletter services have recommended buying shares of it.)
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.
Understanding the concept of price multiples can help you assess stock prices more effectively and determine which ones seem most undervalued and therefore likely to rise.
The word “multiple” usually refers to a company’s price-to-earnings, or P/E, ratio, which is its current stock price divided by its last 12 months of earnings per share (EPS). A company trading at $60 per share with an EPS of $3 has a P/E of 20; it’s trading at “20 times earnings” or at “a multiple of 20.”
It can be helpful to compare a company’s multiple with what seems to be a fair multiple, given its industry and competitive position. Let’s say that the peers of Gas Prices Inc. (ticker: ARMLEG) all have multiples in the high 20s and its own multiple is in the mid-teens. A low multiple can be promising, suggesting that the stock is undervalued and that the price will increase as the multiple catches up to its peers. (It can also indicate a firm that’s losing in the marketplace, though.)
Briskly growing earnings are also promising, since earnings growth drives stock price growth. Rapid growth can sometimes justify a relatively high multiple. How fast earnings grow is a good indicator of how high a company’s P/E should be. That’s why some industries sport higher average P/E ratios than others.
Expected earnings growth coupled with multiple growth can offer a powerful one-two punch. (Warning: Numbers ahead!) Imagine a stock trading at $30 per share – 10 times its EPS of $3. As earnings grow, the stock price will likely increase, maintaining the multiple. For example, when earnings are $5 per share, the stock price should be near $50. But if the multiple itself is also growing, the price is likely to increase even more. If a reasonable multiple is more like 15 and the earnings are $5 per share, the stock should eventually approach $75 per share.
Companies generating above-average earnings growth and trading at below-average multiples can be good candidates for further research. They may end up turbo-charging your portfolio.