Anyone care to weigh in on a stock strategy?

[jodi]

Ok, to be clear, I am not asking for any specific advice, and I certainly don't want anyone to feel that they have steered me one way or another - just a general strategy question. Okay? Okay.

I am pretty much new to investing. I turned over all control of our investments to DH. I have mentioned previously that we had one big, big loser last year. It is a company that does sub-prime lending (I just found this out today! No more being clueless for me). As you can imagine, it did not fare well in the housing decline. The price went from $11-$12 a share to a low of about $2.50. We sold half of what we had somewhere around the $6 mark (took about a $1700 loss). We have 260 share right now. The company was just purchased today by another lender. The stock price went to $5, give or take, giving us a $650 or so increase today.

Any advice on how to research this to see if we should take what little increase we have and run, or whether to stick it out to see if things improve under the new company? I'm flying blind here...(and no lectures on how people who don't do their homework should not be investing in individual stocks...lesson already learned here!)

[humandraydel]

How was the company bought? With cash or stock in the new company? If it was bought with cash, or mostly cash, it's quite possible you don't even own the stock anymore! If it was bought with stock of the new company, then you need to research that company and see what it's fundamentals are. Is the new company primarily a sub prime lender also? If so, I'd probably sell the stock in the new company as well, as sub prime is going to get worse before it gets better.

[jodi]

http://news.moneycentral.msn.com/tic...m bol=US:FICC

This is the link to the article about the buy-out. Am I missing something, or are they not saying how the stock was bought? This doesn't sound good...

Oh wait, DH just found an article that says it was bought in cash. Does that mean they will buy out our shares at the purchase price (which was $5.53/share)?

[humandraydel]

Originally Posted by jodi

Oh wait, DH just found an article that says it was bought in cash. Does that mean they will buy out our shares at the purchase price (which was $5.53/share)?

Precisely. You have no choice but to sell.

[sweeps]

Well, the stock price is currently at $4.98. It's interesting it's not closer to $5.53... there may be concern that the deal will fall through. You could hang on and get the $5.53, but if the deal crumbles for some reason, the stock will plunge.

[jodi]

oohhh, decisions. I wish the price were at least a little bit higher - then the choice would be easy. I assume I have the weekend to think this over since the market is closed anyway?
So, to be sure I have this right, if the price gets closer to $5.53, then I should sell just to cover myself in case the deal falls through? If the deal goes through, I will receive $5.53 per share that we own. It's $143 difference if I were to sell now, or wait until the price hits $5.53. Not a big difference in the whole scheme of things...but still...

[kv968]

Originally Posted by sweeps

Well, the stock price is currently at $4.98. It's interesting it's not closer to $5.53... there may be concern that the deal will fall through. You could hang on and get the $5.53, but if the deal crumbles for some reason, the stock will plunge.

There's also a stipulation that if the company being bought doesn't settle some sort of litigation before the merger, the offer will be reduced by $.20/share.

[JBinKC]

When is the deal supposed to consummate and is there potential for a competing offer? Not looking at the specific details it appears the large current discount implies that the deal may perhaps fall through.

When I am get in a buyout situation I have always sold because the potential growth opportunity in that particular stock ceases.

I am sorry for your disaster but what prompted you to buy it in the first place. Hopefully you weren't railroaded by a broker. If so I would consider arbitration.

[jIM_Ohio]

If you have other stocks with a gain, you could sell the gainers to offset the losses.

If you would not invest in company today, sell, get out and reinvest proceeds into something more promising...

personally the only stocks I buy are the ones which pay a dividend. If a company drops it's dividend, it's a sign things will get worse.

[Broken Arrow]

Originally Posted by jIM_Ohio

If a company drops it's dividend, it's a sign things will get worse.

Uh, not necessarily.

In most cases, the best performing stocks will never pay dividends. That's because... they don't have to. There is already plenty of appeal in its growth. As an added bonus, not having to pay dividends often means more cash in the coffer for growth and innovation. Microsoft was a great example of this.

Of course, Microsoft has since matured, and in order to maintain its appeal, it has started paying dividends. And the more stable (and shaky) a company is, the more they would have to pay in dividends to keep its shareholders happy.

But unlike Microsoft, not every company has a war chest large enough to pay dividends AND maintain its growth and innovation.

So, if anything, the more a company pays in dividends, the more it is a sign that things will get worse.

[jIM_Ohio]

Originally Posted by Broken Arrow

Uh, not necessarily.

In most cases, the best performing stocks will never pay dividends. That's because... they don't have to. There is already plenty of appeal in its growth. As an added bonus, not having to pay dividends often means more cash in the coffer for growth and innovation. Microsoft was a great example of this.

Of course, Microsoft has since matured, and in order to maintain its appeal, it has started paying dividends. And the more stable (and shaky) a company is, the more they would have to pay in dividends to keep its shareholders happy.

But unlike Microsoft, not every company has a war chest large enough to pay dividends AND maintain its growth and innovation.

So, if anything, the more a company pays in dividends, the more it is a sign that things will get worse.

Less than half of all stocks pay dividends. I have to look real hard to find stocks I like which pay them...

I have seen two companies drop a dividend which I owned (DCN and XRX). Both fell considerably once they lowered (DCN) or dropped (XRX) their dividend.

If someone was buying a stock based on the yield (higher yielding stocks) that is a recipe for disaster (because in this case I agree with your comments).

However looking at the long term history of PG, MSFT and other large companies... the ones which pay a dividend give steady long term performance of increasing share holder value. There is a tax cost to this strategy... But with dividend tax advantage right now, I think it's a good way to go.

The issue is knowing what a payout ratio is (portion of profits paid in dividends) and knowing to avoid companies with high payout ratios. MSFT payout ratio is 32%. Meaning it reinvests 68% of it's profit into it's business. I would not want a payout ratio too much higher than 50%.

PG payout is 43%
TLB payout is 52%
HPQ is 17%
F cannot have a payout ratio because it is losing $

I think we could agree from the 5 stocks, TLB (a mid cap company) and F are the least stable. A dividend is cash in my pocket... that cannot be "taken away". Much more tangible than the Enron's or Worldcom's of the world.