The Motley Fool Take
An effective investing strategy is to invest for the long term in companies with solid business models. A good example is electronic payment processing giant Visa (NYSE: V).
Among the four major credit card networks, Visa is the market share leader by far. It’s very geographically diverse, operating in most countries, so a slowdown in one country or region can often be offset by growth elsewhere. MasterCard CFO Martina Hund-Mejean has noted that 85 percent of global transactions are still being conducted in cash, suggesting plenty of room for further credit card growth.
Visa has productive partnerships in place, and supplements its organic growth with acquisitions. It has taken a 10 percent stake in rival Square, and even more important, is buying former subsidiary Visa Europe for around $23 billion.
Over the past decade, Visa’s revenue has grown by a double-digit percentage in all but two years, and based on Wall Street’s estimate of $14.9 billion in revenue this year, Visa may quintuple its top line since 2006. The company’s profit margins are very fat - and growing. It keeps nearly 48 cents of every dollar it takes in as profit. It also generates substantial free cash flow - more than $6 billion annually.
Visa’s dividend yield isn’t huge now, but its payout has been growing briskly. (The Motley Fool owns shares of and has recommended MasterCard and Visa.)
Ask the Fool
Q: How should I invest the money I’ve saved to buy a house within a few years? - F.Y., Spring, Texas
A: The stock market is a great option for long-term money, but it’s the wrong place for any funds you’ll need within a few years. In the short run, the market can temporarily plunge with little notice, and that can derail your plans. In the long run, it has averaged gains of close to 10 percent per year. Even that is an average, though, and not a guarantee.
Don’t risk money you’ll need within three years (or even five or 10 years, to be more conservative) in stocks. Protect your principal by investing short-term money in safer places, such as CDs or money market accounts. You can find good rates at bankrate.com.
Q: What is a “poison pill” strategy? - N.R., Mansfield, Ohio
A: Sometimes referred to as a “shareholder rights plan,” it’s a strategy a company may use in order to avoid being taken over.
One kind of poison pill involves shareholders (but not a would-be acquirer) being permitted to buy additional shares of company stock at a discount. This dilutes the value of each share, including those held by the acquirer, making a buyout more difficult and costly to pull off. Another poison-pill tactic is to allow shareholders to buy the would-be acquirer’s stock at a discount in the event of a merger. Poison pill rules are typically triggered whenever some party’s ownership stake in a company crosses a set threshold.
Poison pill strategies may be effective, but they’re not always embraced. After all, they dilute the voting power of shareholders’ shares - and sometimes a company being acquired is a good thing.
My Dumbest Investment
Well, I bought 50 shares each of Fitbit and GoPro just before the stock market headed south some months ago. Between the two stocks, I have lost more than $2,000. (This was after making $900-plus on Under Armour stock over a couple of months.) I guess I was a bit (or very) overconfident. - W.W., online
The Fool responds: You’re right that those two stocks have swooned. Fitbit and GoPro shares were recently down 54 percent and 42 percent, respectively, year to date. It’s rarely useful to assess any stock’s performance over just a few months, though. Great wealth is often built in the stock market over many years, instead. Any great company can see its shares slump for a protracted period before bouncing back and hitting new highs.
The stock market itself will occasionally plunge, too, though its overall trend has always been up. Patience can pay off - as long as you remain a believer in your portfolio’s holdings. You need to assess whether you’re still confident in the companies’ futures.
The market for wearable fitness trackers seems solid and growing, but it’s not clear whether Fitbit, facing ample competition, will be a long-term winner. GoPro’s wearable cameras were very hot for a while, but demand has cooled a bit. Whether you might buy, sell or hold either depends on your outlook for the company. (The Motley Fool owns shares of and has recommended GoPro.)
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