February 2, 2014 in City

Motley Fool: EMC carries big balance sheet

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Associated Press photo

A former Apple investor tells the Motley Fool he regrets waiting so long to sell his shares.
(Full-size photo)

You probably haven’t heard of EMC (NYSE: EMC), but the stock market recently valued the company at more than $50 billion, ahead of General Motors, Target and FedEx.

EMC is the world’s largest provider of data-storage systems, serving large and small companies and government agencies around the world. It employs more than 60,000 people and has more than 400 sales offices in 86 countries.

EMC continues to benefit from the rising demand for video bandwidth and electronic data storage capacity. The company has also been scaling up its involvement in cloud-computing and data analytics services. (It owns most of the cloud-computing specialist VMware, too.)

EMC’s balance sheet is solid, with more than $6 billion in cash and short-term investments, giving it the ability to pounce on opportunities and little debt to constrain it. It has averaged double-digit annual growth rates for revenue and earnings over the past three years, too.

The technology arena is not for the risk-averse. But with a forward-looking price-to-earnings (P/E) ratio near 11, well below its five-year average near 24, EMC’s stock is looking rather attractive. It offers a 1.5 percent dividend yield, too, and has been buying back many of its shares, boosting the value of remaining ones. (The Motley Fool owns shares of EMC and VMware, and its newsletters have recommended VMware, FedEx and General Motors.)

Ask the Fool

Q: How does buying stocks “on margin” work? – J.M., Kalamazoo, Mich.

A: It’s when you invest with money borrowed from your brokerage, paying interest for the privilege. Using margin will amplify your gains – but also your losses.

Here’s an extreme example: Imagine that you hold $100,000 of stocks and you borrow $100,000 on margin to invest in additional stock. If your $200,000 portfolio doubles in value to $400,000, you’ll have earned an extra $100,000 (less interest expense) thanks to margin.

But if your holdings drop by 50 percent, they’ll be worth $100,000 and you’ll still owe $100,000 (plus interest). That will leave you with … nothing. Your holdings dropped by 50 percent, but margin amplified that to a total, 100 percent loss. Margin cuts both ways.

Consider the interest expense, too. If you’re borrowing on margin and paying 9 percent interest, you should be pretty confident your borrowed stocks will appreciate more than 9 percent. If they fall below a certain level, you’ll receive a “margin call.” If you can’t add the required additional dollars, the brokerage will sell some of your holdings to generate the cash, possibly resulting in short-term capital gains taxed at high rates.

Only experienced investors should use margin, and many have done well without ever using it.

My dumbest investment

My worst investment decision was not selling Apple at $700 per share. I believed the hype that it would hit $1,000. I did manage to escape by $550. I realized a very good return on my initial investment, but greed got in the way of a great return. – S.M.T., Cranford, N.J.

The Fool responds: You submitted this regret some months ago, when Apple shares were trading in the low $400s. They’ve recently been in the low $500s, reminding us of the value of patience.

Try not to evaluate your investments by looking backward, at how much they’ve grown or shrunk. Instead, try to assess whether they’re overvalued or undervalued considering how well you expect the company to perform going forward.

If you thought, for example, that Apple would keep introducing innovative products and charging premium prices for them, you might have opted to ride out downturns, expecting shares to recover and keep growing – to $1,000 and beyond. If you thought Apple’s growth phase was over or even if you were just very uncertain, maybe selling was smart, no matter the stock price.


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