Ask the Fool: Stagflation Worries
Q. I’ve heard many economists are worried about “stagflation” — what’s that? — G.K., Londonderry, New Hampshire
A. Stagflation, combining the words “stagnation” and “inflation,” refers to an economic environment with slow growth, high inflation and high unemployment. The Corporate Finance Institute notes, “Such an unfavorable combination is feared and can be a dilemma for governments since most actions designed to lower inflation (such as hiking interest rates) may raise unemployment levels, and policies designed to decrease unemployment (such as lowering interest rates) may worsen inflation.”
Many economists are not too worried about stagflation in the United States right now. For one thing, unemployment is currently very low, recently at 3.2%. And inflation, while high, has shown signs of slowing, with gas prices and airfares recently dropping.
Q. Who are the main players trading in the stock market, making prices go up and down? — B.N., Davenport, Iowa
A. Many are individual retail investors placing small buy and sell orders through brokerages. There are also big institutional investors doing a lot of trading, such as banks, credit unions, pension funds, mutual funds, hedge funds and insurance companies.
Stock prices rise or fall due to supply and demand. When a stock is in great demand, many will want to buy, and its price will rise. If it falls out of favor, there will be many sellers, and the price will fall until it hits levels at which there are buyers.
Big players may benefit from fancy research departments, but small investors have advantages, too. For example, we may invest in a great small company early, before institutions start to pile in. Once they start buying many shares, that can drive up its stock price, benefiting smaller, earlier investors.
Fool’s School: Profit Margins, Explained
If you’re looking to invest in healthy, growing companies, you’ll need to learn about margins. There are several kinds of margins to know about.
Profit margins are easy to calculate once you get your hands on a company’s income statement (sometimes referred to as a statement of operations); it reports revenue and profits (among other things) over a period of time, such as three months or a year. You can probably find such financial statements in the “investors” section of a company’s website. Otherwise, sites such as Finance.Yahoo.com let you search for them.
Let’s review Coca-Cola’s income statement for 2021. At the top is total revenue of $38.7 billion. As you work your way down, you’ll see various costs subtracted from revenue, leaving different levels of profit. The item you’ll find just under revenue is “cost of goods sold” (sometimes abbreviated as COGS, or called cost of revenue) — the cost of providing products or services. For Coca-Cola, that’s $15.4 billion. Subtract the COGS from total revenue, and you’ll get a gross profit of $23.3 billion.
To find the gross profit margin, which reflects the percentage of a company’s revenue left after subtracting direct expenses such as labor and materials, just divide the gross profit by revenue. Dividing $23.3 billion by $38.7 billion yields a gross margin of 0.60, or 60%.
Next, remaining costs involved in operating the business, such as utility bills and advertising expenses, are subtracted, leaving the operating income (also called operating profit). For Coca-Cola, it’s $10.3 billion. Divide that by revenue, and you’ll get an operating margin of about 27%.
Finally, after items such as taxes and interest payments are accounted for, we arrive at net income, near the bottom of the statement. Coca-Cola’s is $9.8 billion. Dividing that by revenue yields a fat net profit margin of 25%, reflecting how much of every dollar of sales Coca-Cola keeps as profit.
Learn more about how to invest in the “investing basics” nook at Fool.com.
My Smartest Investment: A Great Match
My smartest investment? Well, considering that I met my wife through Match.com way back in the Oregon Trail days of online dating (around 2004) — and that I’ve made a 345% return on the stock since investing in it — I’d say Match Group has been my best investment, hands down. — D.P., online
The Fool responds: It’s hard to argue with that kind of smart investment!
Connecting with Match.com may have been your best investment even if you hadn’t bought the stock. It’s worth pointing out that while a 345% return does indeed seem great, knowing how long you held the stock would let us determine just what your average annual growth rate has been. If you gained 345% over five years, for example, you’d have averaged 35% per year. If your 345% gain had been in a stock you held for 20 years, your average annual gain would have been about 8%, a bit below the S&P 500’s average return.
Today, Match Group is an online dating powerhouse, home to not just Match.com, but also Tinder, Hinge, OkCupid, PlentyOfFish and OurTime, among other sites. (Tinder is the most downloaded dating app worldwide.) It rakes in more than $3 billion annually, and has over 16 million paying subscribers.
— distributed by Andrews McMeel Syndication
