Ask the Fool: Poison pills explained
Q. What’s a “poison pill” strategy when it comes to companies? — S.C., Missoula, Montana
A. It’s a strategy used by public companies to thwart hostile takeovers by making it harder for a would-be buyer to gain a controlling interest in a company. For example, when Carl Icahn had accumulated nearly 10% of Netflix’s shares back in 2012, Netflix instituted a “shareholder rights plan” that would be triggered at 10%. It would permit the company to sell many more shares at a discounted price to shareholders other than the would-be acquirer, thereby diluting the value of that person’s stake.
More recently, Twitter adopted a similar poison pill when Elon Musk was trying to buy the company in 2022, but, ultimately, the company accepted his offer.
Poison pill plans can successfully fend off takeovers. But they’re not without risks. For example, they can prevent takeovers that would actually end well. And diluting shares can hurt existing shareholders.
Q. Should I avoid companies with low profit margins? — L.F., New Rochelle, New York
A. Not necessarily. A piano company, for example, might have a 10% profit margin, but it might only sell a few pianos per week. Compare that with, say, supermarket giant Kroger. Its net profit margin was recently just 0.73%, but its annual revenue was close to $150 billion. That’s enough to generate a net profit of more than $1 billion.
High profit margins are generally preferable, as they often reflect competitive advantages (such as economies of scale or a strong brand that permits higher prices). But modest profit margins need not be deal-breakers. Note, too, that some businesses, such as furniture stores, tend to have low margins, while others, such as software companies, tend to have high ones.
Fool’s school: Keeping medical costs in check
When it comes to our long-term health, there are few guarantees — even if we get healthy and stay healthy. Here are some ways to manage your medical expenses.
- Carry health insurance. It’s costly, but it’s important. Compare the plans available to you and, if possible, select a solid one.
- Have an emergency fund ready. If you keep at least three months’ worth of living expenses available, it might save you in the event of an unexpected job loss or hefty medical bill. At a minimum, it might cover the deductible on your health insurance plan.
- Plan for expected healthcare expenses. If you know that you’ll be paying for certain things in the years ahead, save up for them. They might include costly medications, doctor visits for illnesses, upcoming surgeries or dental work.
- Make use of Flexible Spending Accounts (FSAs) or Health Savings Accounts (HSAs). FSAs are mostly use-it-or-lose-it, while HSA money accumulates and can be tapped in retirement (even for nonmedical expenses, if you pay taxes on it). Both types let you set aside pretax dollars to pay for qualifying healthcare expenses. Read up on each to see which will serve you best.
- Ask for generic medications when they work for you. Don’t overlook generic alternatives that could cost you far less. Search for manufacturer coupons for medications that don’t have a generic option.
- Read through medical bills carefully. You can’t count on your bills to be correct, and patients are often overcharged or double-charged. Request an itemized bill, and if you spot any errors, ask that they be fixed.
- Negotiate. Many charges are not set in stone. If you can’t pay your bill, call your doctor’s office or a hospital’s finance department to see whether they can work with you. They might reduce the bill or set up a payment plan. This tactic won’t always work, but it’s worth trying.
A little online digging will turn up more tips that can shrink your healthcare costs.
My dumbest investment: What to do with losing stocks
One of my most regrettable investments was in Charlotte’s Web Holdings, a company that specializes in hemp-derived CBD wellness products. At least I didn’t put too much into it. I invested more money in another stock and lost even more. I’m still holding on to my losers, though, hoping someday they’ll bounce back, but maybe I’ll sell all my bad stocks and put that money into Tesla or Nvidia. I’ve already got huge gains in those. It’s hard to know what to do. — J.K.J., online
The Fool responds: Many investors vacillate over what to do in these situations. But ask yourself: Which stocks do I have the most confidence in? Which ones do I think will grow robustly over many years to come? Those are the stocks that deserve your hard-earned dollars. If your losers don’t inspire much confidence, it’s probably best to sell and move on. Hanging on to your big winners for many years is also a smart move.
Remember, too, that you can take a lot of difficult decision-making out of the picture by just investing in one or more low-fee, broad-market index funds, such as the Vanguard Morningstar Total Stock Market ETF (VTI) or the Schwab U.S. Dividend Equity ETF (SCHD).
(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)
Foolish trivia: Name that company
I trace my roots way back to a flour mill started beside the Mississippi River in 1866. By 1880, my flour was well regarded, with a brand name any Olympian would love. In 1928, I merged with other millers and got a new name. I introduced Bisquick in 1931. Cheerioats debuted in 1941 and later became Cheerios. At times, I owned Parker Brothers and Red Lobster. I employ 30,000-plus people and my foods are in around 90% of U.S. households. Today, my brands include Nature Valley, Blue Buffalo, Haagen-Dazs, Old El Paso, Pillsbury, Betty Crocker, Totino’s and Annie’s. Who am I?
Last week’s trivia answer
I trace my roots back to 2006, when I was founded by some guys who had also built Expedia. They didn’t like that so much information about homes for sale was only available to real estate agents, so they made much of it available to all — including, initially, estimated home values for 40 million homes. I launched rentals in 2009. I had my initial public offering (IPO) in 2011. By 2015, I had 150 million unique monthly visitors. My name is a mixture of a word for a cushion and a word for lots of money. Who am I? (Answer: Zillow Group)
The Motley Fool take: Flying under the radar
Meet TransDigm Group (NYSE: TDG), an aerospace company few have heard of — though it has posted average annual gains of 16% over the past five years and 17% over the past 10. The company went public in 2006 with a share price of $21, and it recently traded near $1,080 per share. But as of mid-September, its stock was down 19% this year, presenting an intriguing opportunity for long-term investors.
TransDigm operates somewhat like a private equity firm, identifying and acquiring hidden gems in the vast world of aerospace suppliers and then growing those businesses in-house. It’s a holding company for an array of aerospace businesses, supplying both components for new airframes and spare parts that keep existing fleets running.
The company recently boasted 55 independent operating units, 136 global manufacturing locations and more than 18,000 employees worldwide. It has roughly $10 billion in annual revenue. In its most recently reported quarter, TransDigm’s net sales popped 23% over year-earlier levels to $2.7 billion, while net income rose 10%.
TransDigm’s formula has worked well for investors. The company has a long track record of delivering software industry-like gross profit margins north of 40%, even during economic downturns. (The Motley Fool owns shares of and recommends TransDigm Group.)
— distributed by Andrews McMeel Syndication
