Wise food choices can fatten your portfolio

Who would have thought Cheerios could be more profitable than investment banking? While the overall market plunged 4 percent in a single day recently, General Mills (NYSE: GIS) served up a solid quarterly earnings report.

But while net sales grew by 14 percent, earnings dropped by 3.6 percent. The gross profit margin dropped by 1 percentage point, too, as the cost of goods sold exploded by 20.3 percent.

Commodity prices are pinching margins. In response, management is hiking prices, while expecting increased earnings. With a forward price-to-earnings (P/E) ratio around 18.5, the stock price might appear steep, but the company has spent more than $500 million repurchasing shares, suggesting that General Mills might just be sitting at an attractive price.

Food companies are becoming more attractive to many investors, offering reliable revenue growth and palatable earnings through a challenging commodity market. General Mills has averaged 11 percent annual gains over the past five years, with a dividend yield recently around 2.5 percent.

Of course, it’s important to pick your foodies wisely. Some, such as ConAgra, are struggling to keep up with commodity increases. General Mills may not be glamorous, but it is delivering the comfort-food satisfaction that weary investors are craving in this crazy market.

Ask the Fool

Q: At what point does a portfolio have too many shares of one stock? – G.R., Mobile, Ala.

A: First, think in terms of total value, not number of shares. You might have 2,000 shares of one stock, worth a total of $4,000, and 100 shares of another stock, worth $7,000. Focus on the percentage of your portfolio that each stock represents.

If one of your holdings represents 50 percent of your entire portfolio, for example, that’s too much risk for most people. If anything happens to that one holding, your portfolio will take a big hit. If you hold too many stocks, though, and your biggest holding represents just 2 percent of your portfolio, that’s not ideal, either. If that stock doubles or triples, its overall effect will be small.

For most people, eight to 15 stocks is a good number of holdings to aim for. You want some diversification, but you don’t want more companies than you can follow. When one holding grows to become too big a chunk of your portfolio – perhaps 15 to 30 percent – consider selling off some of it.

Q: I own stock in several companies. One has lost value, one is about the same after 10 years, and a few have done well. I need to pay my son’s college tuition now, so which stocks do I sell first? – H.H., Tulsa, Okla.

A: First, forget how the stocks have done in the past. What matters is each company’s future. Try ranking them by how much confidence you have in their health and growth prospects. Sell the ones in which you have the least faith. Your money should always be concentrated on your best ideas.

My dumbest investment

My dumbest investment was rolling over an IRA from one mutual fund (Kemper Technology) to another (Brandywine) just before Kemper’s year-end dividend of $2 per share was declared. My first mistake was bad timing, and the second was transferring the entire amount instead of the minimum that Brandywine required. – Betty Whitehead, Jacksonville, Ill.

The Fool Responds: Moving your money wasn’t such a bad mistake. The Kemper fund, now known as the DWS Technology A fund, doesn’t look more attractive than Brandywine.

For one thing, it sports a sales load of 5.75 percent, meaning it will lop off $575 of a $10,000 investment on day one. Brandywine is a no-load fund, with a market-beating 10-year average annual gain of 7.4 percent, compared to just 1.4 percent for the DWS fund.

Your timing was indeed regrettable, though. Always make sure you’re not due to receive a dividend payment soon, before you sell out of a fund. You can always just call the fund company and ask.

To research mutual funds and their records and fees, among other things, click over to Morningstar.com.