Ask the Fool: Understanding “Priced for Perfection”
Question: I came across a stock that is described as “priced for perfection.” What does that phrase mean? — S.C., Warsaw, Indiana
Answer: When a stock is said to be “priced for perfection,” it means that its price has been driven up high by investor excitement and enthusiasm. This price assumes that the company will execute its plans flawlessly, with no room for mistakes.
Different people have various opinions about whether a stock is undervalued, overvalued, or valued just right. For example, stocks of companies like Costco, Palantir Technologies, and Intuitive Surgical may be seen as being priced for perfection right now.
Take Costco, for instance. Its forward-looking price-to-earnings (P/E) ratio is 49, which is significantly higher than its five-year average of 38. Additionally, its price-to-sales ratio stands at 1.5, above the five-year average of 1.0. These figures indicate that the stock could be overvalued, making it sensitive to declines if there’s bad news.
Question: What is shareholder yield? — A.C., Greensburg, Pennsylvania
Answer: Shareholder yield includes the total benefits a company provides to its shareholders, not just through dividends. While dividends show how much a company pays out based on its stock price, other methods of rewarding shareholders include buying back shares, which reduces the total number of shares and increases the value of the remaining shares, and paying down debt.
Some financial services track shareholder yields along with other metrics, which can give insight into how a company rewards its shareholders beyond dividends alone.
Fool’s School: Saving for Retirement with Tax Advantages
If you’re planning for retirement, it’s wise to use tax-advantaged accounts like IRAs and 401(k)s. Starting early can help maximize your savings thanks to the benefits of compounding. Here’s how these accounts work:
-
IRAs: In 2024, you can contribute up to $7,000, with an extra $1,000 allowed for those aged 50 and older. This limit applies to all your IRAs combined. You have until April 15 of the following year to make contributions.
- 401(k) Plans: The contribution deadline for these accounts is December 31 of each tax year. For 2024, the limit is set at $23,000, plus an additional $7,500 for catch-up contributions for those 50 and older, totaling $30,500. Some employers may match contributions, so make sure to take full advantage of that offer.
Both IRAs and 401(k)s come in traditional and Roth formats. Traditional accounts provide a tax break upfront, while Roth accounts allow for tax-free withdrawals in retirement, making them especially beneficial for younger savers.
If you’re self-employed, there are specific accounts designed for you as well.
My Smartest Investment: The Library
One of my best financial decisions was getting a library card early on, allowing me to borrow countless books, movies, and music over 25 years. A standout for me was a book from The Motley Fool. I followed its suggestion to regularly invest in an index fund tracking the S&P 500. By putting in at least $50 each month, my wife and I eventually grew our investment to over half a million dollars. — T.W., via email
The Fool’s Response: Great job! Your experience highlights our advice for most investors: stick with low-fee index funds for the long haul. The S&P 500 has usually returned close to 10% annually, although it averaged about 6% during your 25 years. Your library helped you not only save cash but also grow your wealth—well done!
Foolish Trivia: Guess the Company
I started in 1998 with the idea of renting DVDs by mail. By 1999, I launched subscriptions, and I went public in 2002. My shares have ballooned over 650 times since then, turning a $1,000 investment into over $652,000. Streaming began for me in 2007, and now, I’m valued at over $323 billion with more than 275 million paid members across 190 countries. Who am I?
Last Week’s Trivia Answer
My origins date back to the late 1800s when steam-powered agricultural equipment was being developed. I formed from a merger in 1925 and introduced the diesel-engine tractor in 1931. In 2022, I relocated my headquarters from Deerfield, Illinois, to Irving, Texas, and I am recognized for making construction and mining equipment, among others. My brands include Progress Rail and Perkins. Who am I? (Answer: Caterpillar)
The Motley Fool’s Take: Amazon’s Diverse Growth
Amazon.com (Nasdaq: AMZN) is a formidable player in e-commerce, commanding over 37% of the U.S. market as of 2023, much higher than Walmart’s 6%. However, Amazon’s influence extends far beyond just e-commerce.
In the second quarter, Amazon’s total revenue rose 10% year over year, driven by advertising, cloud services, and subscriptions, along with physical retail sales. Over the past decade, Amazon has maintained a sales growth rate of nearly 23% annually. To enhance profits, it is introducing various cost-saving measures.
Most of Amazon’s operating income is generated from its cloud services. Amazon Web Services (AWS) is the leading cloud provider in a market that grew 22% in the second quarter alone. This diverse revenue portfolio allows Amazon to invest significantly in e-commerce infrastructure, keeping it ahead of traditional retailers.
The company is also exploring new ventures in areas like grocery stores and health care, as well as its satellite project, Project Kuiper.
With its current price-to-earnings ratio below its five-year average, Amazon stock presents an attractive opportunity for long-term investors.
