Motley Fool: Good to be in hot water

A.O. Smith (NYSE: AOS) is one of the three largest makers of water heaters in North America. Its recently depressed stock price presents a compelling opportunity.

Sales have been weak lately, in part because of the decelerating Chinese economy, but in countries moving up the socioeconomic scale, demand for hot water remains. China may be a weak spot today, but A.O. Smith’s products, which also include water and air purifiers, aren’t going to fall out of style.

Then there’s India: A.O. Smith’s business there is tiny compared with its China operations, but the company sees a huge long-term opportunity. Sales in China have grown at a compound annual rate of more than 20 percent over the past decade, and if A.O. Smith can come close to that figure in India, it will be a huge benefit to its top and bottom lines.

Notably, 2019 marks the 25th year in which A.O. Smith has increased its dividend, which recently yielded 1.7 percent. Even better, that dividend has been growing at a good clip. In 2018, the company announced two dividend increases that resulted in its 2018 payout being 36 percent higher than the prior year’s dividend.

With more than $400 million in net cash (total cash minus total debt) on its balance sheet and a business churning out loads of free cash flow, there’s room for a lot more growth.

Ask the Fool

Q: Should I focus on not investing in companies with increasing losses or investing in those with growing profits? – R.P., online

A: Profits are, naturally, preferable to losses, but don’t be hasty ruling out companies. Take some time to look at each company’s big picture, to see what’s really happening. One company might be posting losses because it’s having trouble selling its offerings: It might be facing tough competition, struggling in a price war or having trouble connecting with consumers. Another company, though, might be posting expanding losses while experiencing rapid sales growth due to great consumer interest.

How could that be? Well, remember that profits or losses are what you have after you subtract expenses from sales. A successful company might post losses for some years simply because it’s investing heavily in furthering its growth – perhaps by buying more advertising, building more factories or acquiring other companies or technologies. Such companies can choose to rein in their spending later and suddenly become profitable.

Q: How can I learn about home values in my neighborhood to help me determine my own house’s value? – C.L., Horton, Michigan

A: You might start by asking a local real estate agent, who can come up with a value for your home based on comparable recent sales (“comps”) in your neighborhood.

Online real estate sites can also be helpful. At Zillow.com, for instance, you can look up median sales prices for homes in particular states, cities and neighborhoods.

Some sites even offer an estimate of your own home’s value, but remember that such an estimate is being offered with only partial information. It may not take into account any recent improvements, and it may not be using the most appropriate comps, either.

My dumbest nvestment

Years ago, I started moving my Roth IRA investments out of S&P 500 index funds and into individual stocks. At the time, I was trying to read, listen and learn as much as possible about investing from many different sources. Most of my stock picks were straightforward and based on things I knew or could easily understand, such as Apple, Starbucks, Chevron, Wells Fargo and Disney.

A TV guru did a few segments on an offshore drilling company that convinced me to buy. As the price of oil started to fall, the stock price fell, and I bought more shares in order to lower my cost basis; I was scared to sell at a loss. I figured that at least the dividend yield was high, but then the dividend was cut. I learned a lot. Now I generally only add to my winners. – Nick, Los Angeles

The Fool responds: Adding to winners is a good move, especially if you plan to remain invested in the stock for many years and have great expectations for it. Just don’t buy when the shares seem considerably overvalued.

Beware of “averaging” down – buying more of your losers – because stocks often fall in value for good reasons. Don’t discount the value of just sticking with an S&P 500 index fund, either, as it’s hard to beat the overall market’s performance, and index-fund investing requires little time and effort.