Motley Fool: Value in games

The bear market of 2022 was brutal for video game stocks, deflating shares of companies such as Nintendo (OTC: NTDOY). Video games are only growing in popularity, though, so businesses in this industry still hold tremendous promise.

Nintendo’s incredibly successful Switch gaming console is now six years old, and many have been anxious for a refresh. But the Mario creator has been cagey, cheekily stating that a new game system will be released sometime in “20XX.”

Nintendo’s revenue has been falling steadily from its record high. Remarkably, though, its operating income has remained quite consistent, due in large part to the company’s focus on software and subscription sales that don’t rely on a hardware refresh.

In the meantime, Nintendo has been exploring new lands. “The Super Mario Bros. Movie,” produced by Comcast’s NBCUniversal subsidiary Illumination, just opened. NBCUniversal’s theme parks have also opened two Super Nintendo Worlds – one in Japan and one in Hollywood, California – with two more under construction. Those should generate some stable licensing revenue for Nintendo.

Nintendo has lots of cash and investments and no debt. It pays a dividend (which recently yielded 3.9%), and recently traded at a relatively low price-to-earnings (P/E) ratio of 13. It could be a great power-up for a long-term portfolio. (The Motley Fool has recommended Nintendo.)

Ask the Fool

Q. Is it better to invest in bonds or bond mutual funds? – P.L., Norwich, Connecticut

A. First, understand that long-term dollars are likely to grow faster in stocks than in bonds. Still, it can make sense to include some bonds in your portfolio for diversification’s sake, or because you’re in or approaching retirement and looking for less volatile investments.

All bonds are not alike, though. U.S. government-issued bonds are safest, but will generally offer lower interest rates than corporate bonds. The highest rates are offered by “junk bonds,” so called because they have a greater risk of default.

If you buy a 10-year U.S. Treasury note with a 3.4% interest rate, you’ll know exactly what to expect from it. A $10,000 bond paying 3.4% over 10 years will pay you $340 each year – after which you’ll get your $10,000 back. If you sell the bond before the 10 years are up, you might receive more or less than the $10,000, depending on prevailing interest rates.

Bond mutual funds, often called “fixed-income” funds, can be more volatile. They offer instant diversification across the multiple bonds they hold, but the income they generate will fluctuate along with interest rate changes and with changes in holdings as the fund’s manager buys and sells various bonds. Bond funds charge fees, too, though some are quite low.

Learn more at Finra.org/investors/investing/investment-products/bonds and Fool.com/investing/how-to-invest/bonds.

Q. Where can I find company earnings reports? – A.N., Elkhart, Indiana

A. Try typing the company’s name and “earnings” into a search engine. Or head to the Securities and Exchange Commission website at SEC.gov and click on “Filings.” To keep up with your holdings, review their 10-Q (quarterly) and 10-K (annual) reports.

My dumbest investment

My worst investment move happened in 2009, when I took a few thousand bucks and started day-trading under the tutelage of an online penny stock-trading guru.

I live on the West Coast, and the main stock markets are on the East Coast, so it was really hard getting up at 5:30 a.m. to prepare for trading. After a few months, I had lost it all. It was silly and stupid, but an interesting adventure. These days I invest only for the long term in real companies with a moat. Penny stocks are truly the gutter of the market. – Jeff, online

The Fool responds: Penny stocks (those trading for less than about $5 per share) are notoriously risky and dangerous, in part because they’re often easily manipulated by scammers. Inexperienced investors may think that a $0.20-per-share stock is a bargain and that it’s exciting to be able to buy 5,000 shares for $1,000, but such stocks can easily fall further, while $50-per-share stocks can be undervalued.

Day-trading, too, is best avoided by most of us. It involves making short-term bets on stocks you may know little to nothing about, then holding them for a few minutes, hours or days and hoping to make a quick profit. As you learned, investing for the long term in great and growing, proven companies is a surer path to profits.