Linear Technology weathering storm

Looking at integrated circuit- maker Linear Technology’s (Nasdaq: LLTC) second-quarter report, it’s easy to see why the stock is a Motley Fool Stock Advisor pick. Linear’s competitive moat is a mile wide, and few rivals can afford even the entry fee into this neighborhood.

Linear reported second-quarter revenue up 14 percent over last year, though earnings dropped 7 percent. All things considered in this environment, that’s not bad. Linear is sitting pretty with the fattest profit margins in a notoriously cutthroat market, thanks to its contributions to high-profit, first-to-the-market proprietary products such as the iPhone.

Everything isn’t smooth sailing, though, even for this cash creator. Third-quarter sales are expected to drop another 15 percent to 20 percent from the second quarter, whereas Linear is used to about 6 percent sequential sales growth between these two periods. And even that gloomy outlook assumes that order volumes in February and March pick up a bit from current rates.

But the company appears to be weathering the recession well, buying back $200 million of its $1.7 billion in senior debt notes last quarter and raising its quarterly dividend by a penny to $0.22 per share. (Its yield is around 3.8 percent.) Hard times will separate the wheat from the chaff, and Linear is practically bread already.

Ask the Fool

Q: How do unit investment trusts differ from mutual funds? – K.A., Augusta, Ga.

A: Mutual fund managers invest in assets (such as stocks or bonds) according to stated sets of objectives. Shares are issued and redeemed on demand at a specific net asset value that is determined at the end of each trading day (based on the total market value of the fund’s holdings). The number of shares is not fixed. If many people want to buy in, the fund company will issue more shares.

Meanwhile, a unit investment trust (UIT) invests in a relatively fixed portfolio of investments. These are held until the trust is liquidated at a predetermined date in the future. Investors who want to trade shares of a UIT before it matures can often do so in the secondary market. Unlike a mutual fund, UIT share prices in the secondary market may be priced above or below the net asset value of the trust’s actual holdings. When you buy shares of UITs, you typically pay a sales fee, or load, of about 4 or 5 percent. Many mutual funds carry no sales load at all.

Learn more about mutual funds at www.fool.com/mutualfunds/ mutualfunds.htm and www.ici.org.

Q: What does it mean if a company’s projected price-to-earnings (P/E) ratio is much lower than its current P/E? – L.W., Nevada, Mo.

A: It suggests that rapid earnings growth is expected. Imagine that Holy Karaoke Inc. (ticker: HYMNS) trades for $24 per share and has $1 per share in annual earnings. Its P/E is 24 (24 divided by 1 is 24). If it’s expected to earn $3 per share next year, its projected P/E for that year is 8 (24 divided by 3 is 8).

My dumbest investment

I know this goes back awhile, but during the dot-com boom, I bought shares of JDS Uniphase. It went up like a rocket. I was cruising! But what did I know? It soon plunged 50 percent. Whoopee! A hot buying opportunity for “smart investors,” I thought. I bought more. Then it plunged another 20 percent, then another … all the way down to oblivion. Lessons? Well, maybe: (1) In the style of Warren Buffett, never buy stock in a company whose business you don’t understand. Frankly, I never did understand what the company did. Neither did most of the other investors. (2) If a stock is dropping like a rock, thoroughly understand why before buying more. In JDSU’s case, it was because the market for its products sharply declined. (3) If a stock has a P/E ratio of, say, 200, don’t touch it with a 10-foot pole unless you’ve done a great deal of disciplined, methodical research. – Scott, California

The Fool responds: You learned some excellent lessons. Today JDS Uniphase rates only two out of five stars in our free stock-rating service at caps.fool.com.