Motley Fool: Building material profits

Wall Street has not been pleased with the performance of building-materials specialist Owens Corning (NYSE: OC) in the first nine months of 2018. While a stock slide of more than 40 percent over that period seems to imply that some aspect of the business went off the rails, the more likely explanation is far less entertaining: The company has simply posted some earnings per share numbers in past quarters that didn’t meet analyst expectations.

That doesn’t mean the business is struggling. In fact, second-quarter 2018 revenue jumped 14 percent, and net income soared 26 percent compared to the year-ago period. It’s true Owens Corning has experienced higher-than-expected material costs, which dragged down gross profit margin in the first six months of the year. But the temporary headwinds don’t justify how the shares have been punished. That has created an intriguing opportunity for long-term investors.

Owens Corning stock is now looking undervalued, with a forward-looking price-to-earnings ratio recently well below 10. The tumbling share price has also nearly doubled the dividend yield, recently at 1.7 percent. (The dividend payout has increased by an annual average of 7 percent over the past four years, too, and has plenty of room to grow more.) With management expecting an eventual rebound in material purchasing prices, Owens Corning deserves a closer look.

Ask the Fool

Q: What does “the index effect” mean in the investment world? – H.R., Jackson, Michigan

A: The index effect is what happens when a given stock is added or removed from a major stock index. Remember that companies are routinely added to or removed from various indexes – sometimes because they grow too big or small for the index they’re in, sometimes because they merge with or are acquired by another company, or perhaps because they’ve grown more or less important.

Consider the Standard and Poor’s 500, or S&P 500, as an example. There’s more than $3 trillion invested in index funds that track it – so if it adds a new company to its roster, all of those funds will have to buy shares of that stock, and all that buying can send the stock price up to some degree. Conversely, stocks removed from an index can see their prices fall. Typically, though, these spikes or drops are not long-lasting.

Q: What education and credentials do stockbrokers have to have? – G.B., Portland, Oregon

A: A college degree is often required. Stockbrokers also need to be registered with the Financial Industry Regulatory Authority, typically by passing the Series 7 (general securities representative exam) licensing examination – and perhaps some other exams, too, such as Series 63 (uniform securities agent state law exam) and Series 65 (uniform investment adviser law exam).

Remember, though, that these exams don’t measure a broker’s skill at identifying great investments. Worse still, brokers don’t have to abide by the fiduciary standard that applies to investment advisers, requiring that recommendations be in your best interest. Instead, they just have to offer “suitable” (and possibly high-cost) investments. It can be helpful to think of them, generally, more as salespeople than as independent financial advisers.

My dumbest investment

My dumbest investment by far has been shares of Under Armour. I saw the company’s logo everywhere, which seemed promising. I bought shares three times in about five months – after it would drop, I’d buy more. I stopped after the bad quarters started to stack up, and finally sold most of it to take a tax loss this year. I put the proceeds into my favorite stock, Apple.

The lesson I learned is that I prefer stocks that pay dividends. Dividends keep paying you, even if you have to wait for a company to turn its fortunes around. Dividends also let you engage in dollar-cost averaging, reinvesting your dividends into additional shares of stock. I’m much happier now with Apple, which is a dividend payer and a growth company. It’s the best of both worlds. – Mike C., Apex, North Carolina

The Fool responds: Apple has indeed been rewarding its shareholders well with dividends and share-price appreciation. It’s not a guaranteed gold mine, though.

Under Armour has indeed fallen from its heights of a few years ago. Still, it has its believers, who see growth opportunities abroad, promise from its cost-cutting initiatives and a return to dependable profitability looming. Believers may want to hang on, but there’s nothing wrong with favoring solid, growing dividend payers, either.