The Motley Fool: Every Sunday, useful tips on investing
Q: Since penny stocks are so inexpensive, I can buy thousands of them, which can make me richer faster, no?
A: Sorry, no. Penny stocks might seem like bargains, but they won’t necessarily grow faster than other stocks. A $1 stock and a $60 one can both go up (or down!) by the same percentage in one day.
With a 5 percent increase, the $1 stock will rise in value by 5 cents, to $1.05. For the $60 stock, it’s a $3 jump, to $63. If the $60 stock is tied to a healthier company with competitive advantages, actual revenue and profits, and a lower valuation (perhaps as suggested by its price-to-earnings ratio), it’s likely a much better bargain than the $1 stock.
Penny stocks (which trade for $5 or less per share) can be more likely to plummet than skyrocket. They’re risky, and often hyped and manipulated.
Penny-stock investors are typically looking to get rich quick, but that’s not how reliable wealth-building works. Focus on the long run — plenty of big, successful blue-chip companies have made shareholders happy over many years.
Penny stocks have made many unhappy. It’s fun to own 5,000 shares of something, but not when they crash.
As you learn about investing in stocks, you’ll run across two key approaches: fundamental analysis and technical analysis. We at The Motley Fool have long favored the former.
Fundamental analysts study companies and make investment decisions based on factors such as financial health, competitive advantages, management quality, growth prospects, profitability, price-to-earnings (P/E) ratios and macroeconomic factors.
In contrast, technical analysts focus on charts reflecting companies’ stock-price movements and trading volume, and make investment decisions based on patterns they see in them.
Think, too, of the world’s most famous successful investors, such as Ben Graham, Warren Buffett, Peter Lynch, John Templeton, Shelby Davis, Philip Fisher, George Soros, David Dreman and John Neff.
Despite their different approaches, each outperformed the overall market using fundamental analysis. It’s hard to come up with a group of hugely successful investors known for using technical analysis.
A 2008 study by New Zealand’s Massey University tested more than 5,000 technical analysis strategies in 49 different countries. The result? Not one added value “beyond what may be expected by chance.” A study of Dutch investors found technical investors earned lower returns.
You can succeed with a bad strategy, but usually only in the short term and often due to luck.
The evidence strongly suggests that buying stocks using technical analysis will lose you money. Large nest eggs can be built over many years using fundamental analysis — or simply by investing in low-cost, broad-market index funds.
If you have a parking spot to fill in your long-term portfolio, consider Hertz Global Holdings (NYSE: HTZ). Accounting problems have pressured the stock and may potentially delay the spinoff of its equipment business, but there’s a lot to like in Hertz.
Hertz will be restating its past three years of financial reports. That’s not great news, but it could be worse.
First off, the restatement is focusing on expenses, not aggressive revenue recognition policies or anything that suggests dramatic wrongdoing. Revenue growth, which is critical, will not change.
With the car-rental industry consolidating in recent years, having fewer competitors can prop up prices and profit margins for Hertz. (Hertz has participated in the consolidation, buying Dollar Thrifty last year for $2.3 billion.)
Of course, business landscapes change over time. It remains to be seen whether new ride-sharing businesses such as Uber and Lyft turn into threats for car-rental companies such as Hertz.
Hertz plans to complete the spinoff of its equipment-rental business sometime next year. The move will give the company net proceeds of $2.5 billion, which will be used to pay down debt and reward shareholders via share buybacks (which reduce share count and thereby boost earnings per share). With a forward P/E ratio near 12, Hertz is worth a closer look.