The Motley Fool: Cleaning up with iRobot
The Motley Fool Take
Seeking a growth stock that isn’t very overvalued? Check out home-robot maker iRobot (Nasdaq: IRBT). Its first-quarter earnings report released in April was good enough to send shares up 10 percent in a single day.
For that, management credited its strong results to continued momentum in the United States with its high-end Roomba 980 as well as an “overwhelmingly positive response” to its new Braava jet floor-mopping robot. And that’s not to mention that the Braava jet won’t even arrive in China or Japan until the third quarter. It’s expected to sell well there, thanks to an affordable price and the predominance of hardwood-floor dwellings in the regions.
What’s more, iRobot recently won a contentious proxy fight with Red Mountain Capital. Red Mountain wanted to reduce iRobot’s seemingly aggressive R&D spending (which hovers around 12 percent of annual revenue) to levels commensurate with traditional consumer-products companies - something iRobot reasonably insisted would be a grave mistake, hurting its ability to compete and innovate in the high-tech home robotics industry.
Along with its Roombas and Braavas, iRobot also offers the floor-scrubbing Scooba robot and the Mirra and Looj robots for cleaning pools and gutters, respectively. It used to have a Defense and Security segment, selling robots for commercial uses, but sold that in order to focus more on the home market. (The Motley Fool owns shares of and has recommended iRobot.)
Ask the Fool
Q: Is it smart to avoid investing in companies with losses, since there are plenty of profitable companies I can choose? - B.H., Elyria, Ohio
A: Not necessarily. Many great companies start out losing money. Young enterprises typically have to make large investments in order to establish themselves and grow. So even when a company might be generating hefty revenues, it might be spending even more on advertising and expanding its infrastructure in order to establish a strong position in its industry. At a later date, it can spend less and enjoy profits.
Amazon.com is a great example, as it has posted a few unprofitable years in the past decade - when it was clearly a strong leader. Such a company can turn on the profit spigot simply by cutting back on spending or by inching up prices.
It’s not crazy to invest in companies with losses - as long as you’ve done enough research to be very confident that they’ll one day be profitable. Know that such companies can be riskier than more established companies, with some ultimately failing while others succeed.
Don’t invest too much of your money in unprofitable companies - and there’s nothing wrong with investing solely in profitable businesses. As you noted, they abound - and they can be more reliable, too.
Q: Can you recommend a beginning guide to investing? - O.N., Richmond, California
A: Sure. Check out “The Motley Fool Guide to Investing for Beginners” e-book or “The Motley Fool Investment Guide” (Touchstone, $16). Other good introductions include Kathy Kristof’s “Investing 101” (Bloomberg, $19), John Bogle’s “The Little Book of Common Sense Investing” (Wiley, $25) and Peter Lynch’s classic “Learn to Earn” (Simon & Schuster, $16).
My Dumbest Investment
Our dumbest investment was going with money managers. These supposed experts were touted by our full-service broker. Well! We are probably the only people who ever lost money on (Warren Buffett’s company) Berkshire Hathaway.
And consider this head-scratcher: One money manager sold a stock he had put us in at a loss, and then a week or so later bought it again. I thought: How clever! It has gone down, so he is buying it at a lower price. Ha! He bought it at a higher price, and later sold it again at a loss!
I think we poor non-professionals can do better than that. Also, in the year-end report, our broker noted that the money manager earned returns lower than the S&P 500, “but at less risk.” Huh?
Needless to say, we dumped the money managers and the broker. We’ve done very well, thank you, making our own investment decisions, choosing a mix of stocks and mutual funds, nothing fancy, no options, no pork bellies and no foreign stocks. Simple. - S., online
The Fool responds: Full-service brokerages charge more than discount brokerages because they’re supposed to pay more attention and offer better services. But alas, many money managers are simply not that talented. Many of us can do much better on our own with discount brokerages - and if not, there are always inexpensive broad-market index funds that are solid choices, too.