Motley Fool: Profits from car parts meaning growth

If you’d like to invest in the auto industry but are worried about disruptions from electric vehicles threatening your investments, consider Copart (Nasdaq: CPRT). It’s in the business of selling junked, wrecked and otherwise salvaged cars and recently sported a market value near $7 billion.

Copart is the kind of company that enters the picture at the end of an automobile’s life. Running auctions primarily of vehicles salvaged from auto accidents and facilitating their resale to buyers planning to dismantle said vehicles, Copart doesn’t really care what kind of fuel those cars and trucks (used to) run on. It’s concerned with squeezing the last bit of value out of a dead automobile before it goes to the great junkyard in the sky.

Over the past five years, the company has increased its earnings per share by almost 150 percent, through a combination of expansion, cost efficiency and share buybacks. Over that period, net income has increased 121 percent, while management has repurchased almost 10 percent of shares outstanding.

There’s likely more growth in Copart’s future. It has been expanding its relationships with some of the United States’ largest auto insurers, and the auto-salvage business is still ripe for further consolidation, both domestically and in the other 10 countries where the company operates. Copart’s economies of scale are a big competitive advantage, too. (The Motley Fool has recommended Copart.)

Ask the Fool

Q: What’s the difference between mutual funds and unit investment trusts? – A.E., Pueblo, Colorado

A: Mutual fund managers buy and sell stocks, bonds and/or other assets according to a stated investment strategy. Shares are issued and redeemed on demand at a specific price (the “net asset value”) that’s calculated at the end of each trading day based on the total market value of the fund’s holdings. The number of shares is not fixed. If many people want to buy in, the fund company will issue more shares and will have more money to invest.

Unit investment trusts (UITs), on the other hand, typically debut via a one-time public offering and feature a relatively fixed portfolio of investments. While mutual fund holdings can change considerably over time, UIT holdings are meant to be held until the trust is liquidated at a specified date. Investors who want to trade UIT shares can generally do so in the secondary market. Unlike a mutual fund, UIT share prices in the secondary market may be priced above or below the net asset value of the trust’s actual holdings. UITs generally charge sales fees (or “loads”), while many mutual funds are no-load.

Q: What happens to a stock’s P/E ratio when the stock splits? – K.B., Greenville, North Carolina

A: Splits don’t change price-to-earnings (P/E) ratios. A company’s P/E ratio is simply its recent stock price divided by the annual earnings per share (EPS). A stock trading at $40 per share with EPS of $4 will have a P/E of 10 (40 divided by 4). If the stock splits 2-for-1, the shares will be priced at $20 and the EPS will also be halved, resulting in an unchanged P/E, as 20 divided by 2 is 10.

My dumbest investment

In the mid 1980s, I had about $10,000 to invest, and I was dithering between two companies. One was Convergent Technologies. I worked in technology in Silicon Valley, and thought I understood the company. It was a turnaround play, as the company’s once-rapid growth had stalled due to parts shortages and management issues, among other things, and it was posting losses. A former Hewlett-Packard executive was brought in, which was promising. I bet on Convergent.

The other company was a little startup called Amgen. Had I bought into Amgen at the time instead, it’s highly unlikely that I’d still be holding the shares. But if I had, that $10,000 investment would have been worth more than $12 million today.

I run the numbers again every few years to stay grounded. (And yes, out of masochism!) Now when I look at Amgen’s share price, I get lost in some “what if” kinds of thoughts. There are several huge, important, basic lessons in this story. – P.K., San Jose, California

The Fool responds: There sure are. But don’t be too hard on yourself. One lesson is that while hindsight may be 20/20, you couldn’t have known Amgen’s future back then.

Investing in troubled companies and hoping they’ll get their act together can be risky. You can reduce risk and still do well by sticking to healthy, growing companies that aren’t overvalued.