Ask the Fool: Priced for perfection
Q: I recently read that a certain stock is “priced for perfection.” What does that mean? — S.C., Warsaw, Indiana
A: It means that due to investor enthusiasm, the stock’s price has been bid up so high that the valuation for the company assumes it will execute its strategy perfectly, leaving no room for error.
Opinions will always differ on whether a given company’s stock is undervalued, overvalued or fairly valued. But a case could be made that at recent levels, companies such as retailer Costco, artificial intelligence specialist Palantir Technologies, and maker of robotic surgical equipment Intuitive Surgical all have stocks that are priced for perfection.
One example: Costco’s recent forward-looking price-to-earnings (P/E) ratio of 49 is well above its five-year average of 38, and its price-to-sales ratio of 1.5 is well above its five-year average of 1.0. Such numbers suggest that the stock may have gotten ahead of itself: It could be overvalued and particularly susceptible to a pullback on bad news.
Q: What’s shareholder yield? — A.C., Greensburg, Pennsylvania
A: A company’s dividend yield, showing how much a company pays out in dividends annually relative to its stock price, reflects one way that a company might reward shareholders. There are other ways, though, such as by repurchasing stock (which makes each remaining share more valuable, as the share count shrinks) or by paying down debt.
Some online stock data providers publish shareholder yields for companies, along with dividend yields and other metrics. Sometimes this figure reflects dividends and buybacks; other times it might include debt reduction as well. It’s a handy metric to consider, because while a company may pay little or nothing in dividends, it might be rewarding shareholders in other less obvious ways.
Fool’s school: Tax-advantaged retirement savings
If you’re saving for retirement — and most of us should be doing so — make good use of tax-advantaged retirement funds such as IRAs and 401(k)s. (It’s best to start early, to benefit from the power of compounding!) Here’s a closer look at them.
- IRAs: For 2024, the contribution limit is $7,000, plus an additional $1,000 for those 50 and older. That limit applies collectively to all the IRAs you might own. The deadline for IRA contributions is April 15 of the following year, so you can make 2024 contributions until April 15, 2025.
- 401(k) plans, 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan: The contribution deadline for these accounts is Dec. 31 of each tax year, and the limit for 2024 is $23,000 ($23,500 for 2025), plus an extra $7,500 “catch-up” contribution for those 50 and older, for a total of $30,500 ($31,000 for 2025). Higher catch-up limits are permitted for those 60 and older in 2025. Many employers offer matching contributions to 401(k)s, and some to other accounts. If your employer does this, be sure to contribute enough to max out that matching contribution — it’s free money.
Note that both IRAs and 401(k)s come in “traditional” and “Roth” varieties. Traditional accounts offer an upfront tax break: Contribute, say, $10,000 to your account, and your taxable income is reduced by that amount, shrinking your tax bill. When you withdraw the money in retirement, it will be taxed as ordinary income. With Roth accounts, there’s no upfront tax break, but if you follow the rules, you’ll be able to withdraw funds from your account tax-free.
Roth accounts can be particularly powerful for young people, as they may be able to build fat accounts full of money available to them in retirement with no taxes levied. Traditional IRAs and 401(k)s feature required minimum distributions (RMDs) that start when you reach age 73.
If you’re self-employed, there are special tax-advantaged savings accounts for you. Learn more about many retirement topics at Fool.com.
My smartest investment: All hail the library!
One of my best financial moves early on was getting a library card. It allowed me to borrow numerous books, movies and music over the last 25 years, saving me an untold amount of money. When I look back at all the different books I borrowed over the years, none has been more impactful than a Motley Fool book. I followed its advice and began investing money regularly in an index fund that closely tracks the S&P 500. Each month, my wife and I invested at least $50 in the account. Now, a quarter-century later, we have more than half a million dollars invested in the account. — T.W., via email
The Fool responds: Well done! Your story certainly supports our advice for most people — to just invest for the long term in a low-fee index fund such as one that tracks the S&P 500. We also point out that while the S&P 500 has averaged annual gains close to 10% over many decades, it could be lower or higher during your personal investing period. During your quarter-century, from 1999 to 2024, the S&P 500 only averaged annual gains of 6% — though 8% if you reinvested dividends into additional shares of stock. Your library helped you both save money and make money. Bravo!
Foolish trivia: Name that company
I trace my roots back to 1998, when I was born out of an idea to rent out DVDs by mail. I launched subscriptions in 1999 and went public in 2002. (My shares have increased in value more than 650-fold since then, enough to turn a $1,000 investment into over $652,000.) I started streaming in 2007. Today, with a recent market value topping $323 billion, I’m a global entertainment powerhouse with more than 275 million paid memberships in more than 190 countries. I’ve won 230 Primetime Emmy awards and 23 Oscars for my content. Who am I?
Last week’s trivia answer
I trace my roots back to the late 1800s, when two companies were producing agricultural equipment powered by steam instead of horses. They merged in 1925, forming me. I introduced a diesel-engine tractor in 1931. In 2022, I moved my headquarters from Deerfield, Illinois, to Irving, Texas. Recently valued near $190 billion, I’m a top maker of construction and mining equipment, industrial gas turbines and diesel-electric locomotives, among other things. My brands include Progress Rail, Solar Turbines, Perkins and SEM. I employ more than 110,000 people globally. My ticker symbol could scratch you. Who am I? (Answer: Caterpillar)
The Motley Fool take: E-commerce and much more
Amazon.com (Nasdaq: AMZN) is an e-commerce powerhouse. According to Statista, it controlled over 37% of the domestic e-commerce market in 2023, compared to 6% for No. 2 e-tailer Walmart. But there’s much more to Amazon.
Amazon’s total revenue grew 10% year over year in the second quarter, from sources such as advertising, cloud services, subscription services and physical retail locations. Over the last 10 years, Amazon grew sales at a compound annual rate of nearly 23%. To boost profits, it’s now implementing several cost-cutting initiatives.
Most of its operating income comes from its cloud services business. According to Synergy Research, Amazon Web Services is the top cloud provider in a $297 billion market that grew 22% in the second quarter. The lucrative revenue streams that Amazon generates from non-retail services like cloud computing give it a major advantage over traditional retailers. They allow it to be more aggressive in investing in e-commerce infrastructure to protect its lead.
Amazon is also investing in new growth areas, such as grocery stores, health care and Project Kuiper — its nascent satellite broadband offering.
With a price-to-earnings (P/E) ratio far below its five-year average, Amazon stock seems reasonably valued at recent levels, presenting a good opportunity for long-term investors. (John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and recommends Amazon.)
— distributed by Andrews McMeel Syndication