Motley Fool: Playing defense in a pandemic

The pandemic that’s underway is hitting many companies hard, but some businesses are more resilient than others. Consider Brookfield Infrastructure Partners (NYSE: BIP), which we suggested to you back in October. With the recent market meltdown, its shares tumbled, but although they’ve recovered somewhat, they were recently nearly 15% below those October prices – making them even more intriguing for patient long-term investors.

Brookfield generates most of its revenue from the diversified collection of water, telecommunications, energy and transportation infrastructure assets it owns around the world – invisible infrastructure that’s easy to overlook, but critical to modern society. Its utility services fall clearly on the “necessities” side of the ledger, which should keep cash flowing, even if things continue to deteriorate.

Brookfield also offers a dividend, which recently yielded more than 5%. To be clear: These payouts are not guaranteed, and even the best companies can make changes to their dividend policies in uncertain times. But Brookfield is well-run, with a strong balance sheet and built-in advantages that create a solid margin of safety. That’s particularly important when it comes to supporting dividends. Give it a closer look.

(The Motley Fool has recommended Brookfield Infrastructure Partners. Brookfield is structured as a master limited partnership, which means its tax treatment is different from, and a bit more complicated than, common stocks.)

Ask the Fool

Q: What’s the prime rate? – C.T., Davenport, Iowa

A: The prime rate is the interest rate that most banks charge their lowest-risk commercial customers. It’s typically about 3 percentage points greater than the federal funds rate, the rate at which banks lend money to each other.

The prime rate is used as a base rate for many other interest rates, such as for mortgages, home equity loans, credit cards and business loans. For example, many credit cards set their interest rates by taking the current prime rate and adding a certain amount to it based on the perceived risk to the lender. The prime rate was recently 3.25%, down from 5.5% a year earlier.

Q: Can you explain the “pro forma” term that I see on some financial statements? – S.R., Syracuse, New York

A: When you see “pro forma,” you’re looking at some what-if numbers, reflecting something that might happen (or might have happened), such as a merger, or excluding some unusual items, such as losses from a disaster. (Don’t worry, this will become clearer shortly.)

Imagine, for example, that Peanut Butter International (ticker: GOOBR) merges with General Jelly (ticker: JIGGL) midyear, forming PB&J Corp. PB&J’s next annual report might feature some pro forma financial statements, reflecting what the condition or performance of the new, combined company over the year would have looked like – as if the two original companies had been merged all year long.

Pro forma numbers can allow apples-to-apples comparisons. If you were researching PB&J, it would be hard to compare its results in a pre-merger period with those in a post-merger period. The pro forma data can offer a clearer view of the company’s financial health and growth.

My dumbest investment

My dumbest investment was selling two-thirds of my position in Netflix around a decade ago to cover some college bills. I learned that if you must sell, you should trim your weeds – not the flowers. Don’t sell a stock just because it’s up big: Oftentimes those are the stocks you want to hold, or add to, not trim. – D.K., online

The Fool responds: You’re quite right – it’s smart to sell stocks that have failed you and that you no longer have much confidence in. And adding to your best performers can be good, too, as long as they’re not overvalued.

But there’s some gray area there, too. If you’ve invested in a stock that has grown so much that it now makes up, say, 50% of your portfolio, you’ve got a lot of eggs in that one basket. That’s overly risky. If you need to sell some stocks to free up some cash, it can make sense to trim some oversized holdings. It’s also smart to consider which stocks seem overvalued and which ones seem undervalued. The seemingly overvalued holdings are better candidates for selling.

We understand your pain, though: If you sold shares of Netflix about a decade ago, those shares would have been selling for about $11 apiece. They were recently near $370 – even after falling some because of the pandemic-related market crash.