Investing 301

Evaluating an investment takes time and patience. Here's how to find out what you're buyingbefore you commit.

consider these components:

The Product. A company’s product is its lifeblood. “Talk to the company about their new products, walk through their stores [if possible], or get in on their next conference call,” advises Kurt Brunner, a portfolio manager at The Swarthmore Group in West Chester, Pennsylvania. “It’s important for people to know what they are buying; you don’t just want to throw money at the wall.”

In August 1999, Smith bought Mattel (NYSE: MAT), maker of Barbie and Matchbox cars. With Christmas quickly approaching, the timing was right, “plus, they had a lot of new products coming out, which I thought would be interesting to children,” she says. It turns out that her prediction was right; Mattel gained 13% between March and October 2001.

Investors should also consider this: Is this a unique product? What does it offer? Who is the intended audience? The more you know, the better you’ll feel about the investment.

Competition. Do a careful examination of the company’s competitors. Does the competition have a leg up on your prospect or vice versa? To decide, take a look at the last few earnings reports and see what the income statement and balance sheet look like. Experts say companies like Dell Computer (Nasdaq: DELL) are well respected. It’s a low-cost provider that purchases inexpensive, high-quality products to assemble PCs. On the other hand, Compaq Computer Corp. (NYSE: CPQ) makes a lot of its own products, so it has to incur the expense of doing so.

Management. Are the names behind the company running a tight ship? Check out how long the CEO, chairman, and other key employees have been at the company. “There are companies out there with wonderful products, but they’ve completely mismanaged their organization,” says Eddie Ramos, a vice president and portfolio manager at Brown Capital Management in Baltimore. Look at Apple Computer, for example, he says. “They started the computer revolution, grew the revolution, then Microsoft came along with a more powerful operating system and people left Apple en masse.”

Some signs that management is faltering are restructuring, company executives selling off shares, or key employees jumping ship. Read the business section of newspapers for the scoop.

Industry/Sector. Our experts say look both ways before you cross into buy territory.

“A lot of people look backward,” says Donald Cassidy, a senior research analyst at Lipper Inc. in Denver. “You have to look into the future [as well], and say, ‘What can hurt this industry?'” For example, the airline industry is one to watch. Even in good times, airlines have interest on debt to pay off. This leads to higher operational costs and a higher break-even point than in other industries, which depresses profits, even if half of their fleet is not flying, as the case has been since September 11 with American Airlines, a subsidiary of AMR Corp. (NYSE: AMR).

“I would advise a new investor to stick with industries that are familiar to her,” says Iva Funderburg, the senior equity research analyst at Alpha Capital Management in Detroit. “Once she develops

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