Motley Fool: Fab-less and fab

High-quality audio processor maker Cirrus Logic (Nasdaq: CRUS) may not be a household name, but this “fabless” semiconductor manufacturer (meaning it outsources the actual production of its chips) provides parts that show up in many of the items you use every day. Its chips reside in electronic offerings from LG, Nikon, Samsung and Apple – to name just a few.

Apple’s orders have been very good to Cirrus Logic’s income statement, accounting for 79 percent of Cirrus’ sales in fiscal year 2017. That has been lucrative, helping Cirrus generate free cash flow for the past 12 years – including about $260 million over the past 12 months. Still, it can be risky to be so dependent on one customer – though a temporary lack of high-octane growth won’t spell instant doom for the audio chip supplier, as it can scrape along just fine on yesteryear’s Apple order volumes.

This is a healthy business with no long-term debt and more than $200 million of cash reserves. Yet Cirrus shares were recently trading with a price-to-earnings ratio in the mid-teens – significantly lower than its five-year P/E average of 20. That seems like an overreaction to its recent lackluster quarterly report (which cited weak smartphone sales) and an appealing opportunity for long-term investors. (The Motley Fool has recommended Cirrus Logic.)

Ask the Fool

Q: I would think that Netflix, with its shares near $360 each, might split its stock soon. Would that be a good time to buy? – G.C., Las Cruces, New Mexico

A: Stock splits may seem exciting, but they’re not too meaningful.

When a stock splits 3 for 1, if you originally owned 100 shares, you’d end up with 300. They’re not worth three times as much, though. Their price is reduced proportionately, so if they were trading at roughly $60 presplit, they’ll be around $20 apiece post-split. Their total value is $6,000 both before and after the split – 100 shares times $60 or 300 shares times $20.

Whether Netflix splits its shares shouldn’t matter to you. The important thing when investing is to make sure that you’re buying into a strong and growing company and that you’re not paying too high a price. That valuation isn’t measured by the stock price alone: A $9 stock can be overvalued and likely to fall, while a $1,000-per-share stock might be undervalued and on its way to $2,000 within a few years. Assess valuation measures such as price-to-earnings ratios, price-to-sales ratios, and price-to-cash-flow ratios, and compare them with previous years and with those of competitors.

A stock split means you end up with more shares, but not with more value.

Q: Is it a red flag when a mutual fund no longer allows new investors? – P.T., Columbus, Ohio

A: When funds grow very large, their managers can have trouble finding enough good investments for their shareholders’ money. If they resort to less-promising ones, results can suffer. So sometimes they restrict additional investments in order to keep growth in check. That’s generally a good thing.

My dumbest investment

My dumbest investment was buying stock in a wind energy company on the recommendation of a TV stock guru. The stock dropped like a rock two days later. He made his money! – O., online

The Fool responds: Even skilled investors make some regrettable moves, but the problem with many investing pundits is that you never know just how good they are. Some may indeed be buying into various companies and then talking them up, which helps boost their value if others buy in. (Later, whenever they sell their shares, you rarely hear about it.) Even with trusted stock gurus, though, it’s best to add your own research and thinking to theirs and to make your own decisions instead of just following them blindly.

Don’t judge a stock by its performance over only a few days (or even months), either. The company you invested in has been a penny stock (with shares priced below about $5 per share) for most of the past decade. It’s always best to steer clear of penny stocks, as they tend to belong to younger, smaller and often unprofitable companies. Its share price has recently been below $0.01 per share, and it executed a 1-for-5 reverse split recently, leaving shareholders with one share for every five that they used to own while boosting the share price fivefold. It’s often companies in trouble that do reverse splits, partly to make their share prices look more respectable.