While fear of uncertainty is the greatest fear of all, uncertainty is not the biggest impediment investors face. No, the biggest tripwire investors face is being certain of something, yet still being wrong - and not knowing they're wrong. For example, there are common errant assumptions about what a certain company's business is or even outright stereotyping of a company because of its stated industry. Some of the misconceptions are so, well, misconceived, that it makes you wonder if some really great stocks are being avoided just because investors don't understand the company's business model.
So, here are three clarifications that may put some names in a much more bullish light.
IN PICTURES: Learn To Invest In 10 Steps
Barely a Biotech, More Like a Landlord
PDL BioPharma Inc. (Nasdaq:PDLI) is classified as a biotech stock, but that's largely because there is no category for "royalty-generating organization." That's the core of what PDL does now though. The bulk of the R&D work has been done, resulting in the humanized monoclonal antibodies that are now used by other biotech firms as a biological foundation for everything from asthma to MS.
Of course, the use of PDL's antibody technology results in royalty payments. These payments accounted for 100% of the company's revenue last quarter, as usual. Genentech Inc - now part of the Roche Group - and Biogen Idec Inc., (Nasdaq:BIIB) are a couple of biotechs paying those royalties.
That's not to say PDL BioPharma isn't still working on new uses for its monoclonal antibodies. The complex work behind the underlying technology for all those potential new drugs, however, is the same one the company's been licensing for a while now. As such, R&D costs and risks are minimal.
What's great about it? Don't think for a minute that the business model means consistent income is guaranteed; last quarter's 31% dip in earnings is proof that PDL BioPharma isn't bulletproof. Still, the company could halt its current R&D work right now, cut expenses to the bone and still collect some good money off the backs of others. That's low-risk.
Hardly a Garden Variety REIT
When the company's description of itself includes REIT, residential mortgage, leverage or re-underwrite, that alone is enough to send most investors in the other direction. Chimera Investment Corporation (NYSE:CIM) uses all four terms in its description. Yet, it works for this REIT. Chimera has paid good dividends every quarter since its inception in late 2007, currently yielding 16.71%, and the trust began seeing full-year positive net income in 2009.
What makes Chimera different? At first glance, Chimera looks like just another REIT, and therefore faces the same mortgage-based risks any other REIT faces. When you dig deeper though, you'll find Chimera is actually managed by Annaly Capital Management, and that the trust specifically balances interest rate risk and credit risk - something most other REITs take more of an either/or strategy with.
Also - and this is really deep between the lines - you can tell that Chimera isn't buying off-the-shelf RMBS. They're custom-building their own RMBS deals with banks and lenders. That's a big deal.
Lumped Into Bad Company
Just so there's no confusion, MBIA Inc. (NYSE:MBI) essentially does the same thing that AIG Inc. (NYSE:AIG) did that put the insurer in hot water a couple of years ago. MBIA also does the same thing that Ambac Financial (NYSE:ABK) does, and Ambac is largely expected to become insolvent and/or declare bankruptcy in the foreseeable future.
Knowing that, why would anyone want to invest in MBIA? Aside from the plausible forward-looking price-to-earnings ratio of 7.37, there are two reasons MBIA is attractive right now.
First, it's not like the bond insurance or CDO insurance business is going away. In fact, with Ambac on shaky ground, and AIG still feeling the blow to its reputation, MBIA may actually enjoy a little less competition.
Second, though MBIA slipped into the red in 2007 and 2008 like most other bond insurers did, the company has seen a couple of operating profits as well as GAAP profits over the last four quarters. MBIA has slipped again in the most recent time periods. Semi-related, MBIA's ability to make really bad decisions and take on ridiculous risks never even came close to rivaling AIG's. So, give management a little credit.
There's always more to the story. And, sometimes the story you're sure is right turns out to be completely different. (Knowing what the market is thinking is the best way to determine what it will do next. For more information, see Gauging Major Turns With Psychology.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
Stock AnalysisThese three stocks are resilient, fundamentally sound and also pay generous dividends.
Investing NewsAre stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
Investing NewsHere are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
Investing NewsHere are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
Stock AnalysisIf you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
Mutual Funds & ETFsExplore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
Mutual Funds & ETFsLearn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
Investing NewsWill Ferrari's shares move fast off the line only to sputter later?
Stock AnalysisHere are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
InvestingThe further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>