Motley Fool: Gamble on Procter

Judging by the stock’s performance over the past five years (as of recently, a paltry 8 percent cumulative gain), investors are in a sour mood about Procter & Gamble’s (NYSE: PG) business. Some of that pessimism is justified, given P&G has shed market share in a few key product categories, such as shaving care, during that time. The broader consumer products industry is facing wider challenges, too, including rising costs of raw materials.

Yet P&G is faring better than its peers in some respects. Its industry-leading profitability relies on an impressive selling infrastructure that’s become even more efficient through an aggressive cost-cutting program. It draws strength from its scale and solid retailer relationships.

Consider that even if it downsized to 65 brands, more than a dozen of those generate more than $1 billion in annual sales. As many of P&G’s brands are consumer staples, much of its business has proven to be more resilient during economic downturns.

P&G is aiming for faster sales growth this year and is rolling out significant price increases that could boost earnings. Investors are right to be cautious about that bright outlook, but the stock doesn’t need head-turning revenue figures to outperform rivals from this low point.

The stock is well worth considering for its stability and solid dividend – which recently yielded 3.2 percent and has been increased for 62 consecutive years.

Ask the Fool

Q: Why wouldn’t penny stocks make me rich quickly, when I can buy thousands of them for a few hundred dollars? – B.Y., Hickory, North Carolina

A: Penny stocks are not just stocks with extra-low prices. Trading for $5 or less per share, they can be more likely to plummet than skyrocket. They’re risky and often hyped and manipulated.

While penny stocks may seem like bargains, they won’t necessarily grow faster than other stocks. A $1 stock and a $40 one can both go up (or down!) by the same percentage in one day. With a 5 percent increase, the $1 stock will rise in value by 5 cents, to $1.05. For the $40 stock, it’s a $2 jump, to $42. The $40 stock is likely tied to a healthier company, perhaps with competitive advantages, actual revenue and profits, and a more attractive valuation. If so, it’s a far better bargain than the $1 stock.

Penny-stock investors are often naive beginners looking to get rich quickly, but that’s not how reliable wealth-building works. Focus on the long run: Plenty of big, successful blue-chip companies have rewarded shareholders handsomely over many years, while penny stocks have wiped out many investors.

Q: What’s arbitrage? – R.W., online

A: It’s when you profit from temporary price differences.

For example, perhaps MacDonald Farms Inc. (ticker: EIEIO) is trading at $55 per share on a U.S. stock market and at $55.10 per share on a foreign market. If you simultaneously buy some of the lower-priced shares and sell the same number of higher-priced shares, you’ll reap a profit of 10 cents per share (not counting commission costs). This may seem negligible, but arbitrageurs often invest very large sums.

My dumbest investment

My dumbest mistake was buying shares of Netflix at $17 apiece, hanging on until they hit $19 (thinking that I was the smartest investor since Warren Buffett), only to panic and sell them all at a loss when they dropped to $15. The shares, having split 7-for-1 in 2015, were recently trading for around $350 apiece.

Lesson learned? Have patience, and believe in the business. – P.P., Milwaukee

The Fool responds: You made a classic beginning-investor mistake: not understanding that individual stocks, like the stock market as a whole, don’t rise in value in a straight line.

Long-term believers in Netflix (a stock recommended and owned by The Motley Fool) recently had their faith reinforced when the company reported its third-quarter earnings, exceeding expectations with 34 percent revenue growth, 12 percent operating profit margin, 207 percent earnings-per-share growth and 7 million new members, bringing total membership to 137 million.

Doubters, though, worry the stock is overvalued and that in the face of growing competition, the company will have to keep spending so much on original content that profitability will be elusive. Opinions differ and the future is unknown, but those who think the company will be far larger years from now are hanging on, through pops and drops.