March 16, 2014 in City

The Motley Fool: IMB’s falling stock opens windows of opportunity

Universal Uclick
 
Associated Press photo

This long-exposure photo from March 2013 shows visitors walking through IBM booths at the world’s largest computer expo, CeBIT, in Hanover, Germany.
(Full-size photo)

International Business Machines (NYSE: IBM) shares have fallen more than 14 percent from their 52-week high this year. That reflects a lack of confidence in the company, but it also presents an attractive entry point for believers – and there’s plenty of reason to believe in its future.

IBM is a financially sound company in the middle stages of a successful transition, with strong leadership in CEO Ginni Rometty. Consider that she and other bigwigs gave up sizable 2013 bonuses after a lackluster year.

The company has dismayed some by posting shrinking revenue in recent years. But it has also been transforming itself by investing in higher-growth, higher-profit-margin areas such as analytics, cloud computing and big data, as well as the social and mobile arenas. Some think its “predictive analytics” technology will make major contributions.

Ask the Fool

Q: Are viatical settlements good investments? – K.W., Lubbock, Texas

A: They might be reasonable under some circumstances, but they can be risky and can cause a little discomfort, too.

Viatical settlements involve buying a terminally ill person’s life insurance policy. If someone is expected to live only three more years and needs cash to pay for medical bills or just to spend and enjoy, he might sell his life insurance policy. If it’s set to pay $100,000 on his death, the buyer might pay, say, $66,000 for it.

It sounds like a win-win plan, as the seller gets a load of cash and the buyer can expect to receive $100,000 in about three years – roughly a 15 percent annual return.

It’s not so simple, though. The middlemen who arrange these settlements charge fees. And the sick person might live for many years, significantly reducing the investment’s ultimate return. A cure or powerful new treatment might even have him outliving the buyer.

Many people are uneasy about investing in something that has them rooting for speedy deaths and against medical breakthroughs. Also, there have been many instances of fraud with viatical settlements. “Life settlements” are similar investments, focusing on senior citizens.

Learn more about these arrangements at sec.gov/answers/viaticalsettle.htm and 360financialliteracy.org, and at the viatical.org and lisa.org industry websites.

Q: Is it bad if a mutual fund no longer permits new investors? – H.N., Muskegon, Mich.

A: It’s usually a good sign, suggesting that the fund managers aren’t finding enough top-notch investments for their shareholders’ money and they don’t want to resort to less-promising ones.

When funds get huge, it’s harder for managers to earn high returns, as they have to spread out the money more.

My dumbest investment

My dumbest investment was buying $5,000 worth of Netflix shares when they were trading near $75 in 2012 – and then selling them when they fell to $50 per share. – W.G., online

The Fool responds: You’re right – that’s a painful loss. With the stock recently trading near $450 per share, you’d have had roughly $30,000 worth of shares today, for a sixfold gain.

It’s natural to think about selling when a stock is crashing, as Netflix has done several times in recent years. But you should ask yourself a few questions before selling. For starters, have you truly lost faith in the company? If so, then sell. If not, has it fallen due to short-term, fixable problems (such as flooding at a supplier’s factory) or serious, long-term ones (such as a strong competitor eating its lunch)?

Netflix fumbled when it planned, and then canceled plans, to split off its DVD-by-mail service as “Qwikster.” It has come back strong, though, gaining millions of members and sealing deals to offer more content. Its move into original programming, such as with “House of Cards,” has also been successful.


There is one comment on this story. Click here to view comment >>

Get stories like this in a free daily email