Unit Investment Trusts
Q. Are unit investment trusts like mutual funds? — P.D., Winona, Minnesota
A. Both are regulated and offer diversification via an assortment of stocks, bonds and other securities, but they differ, too. At the end of each trading day, mutual fund shares are issued and redeemed on demand at a specific price (the “per share net asset value”) that reflects the total market value of the fund’s holdings divided by the number of shares. The number of shares isn’t fixed; if lots of people want to buy in, the fund company will issue more shares and have more money to invest.
Unit investment trusts (UITs), in contrast, have a fixed life, debuting via a one-time public offering and ending on a specified date via liquidation. While mutual fund holdings often change a lot over time, UITs feature a relatively fixed portfolio of investments. Investors who want to trade UIT shares do so on the secondary market, where share prices may be higher or lower than the net asset value of the trust’s holdings. Learn more before investing in a UIT.
Q. Can you recommend any good books about how to spot bad behavior by companies in their financial reports? — C.F., Greensburg, Pennsylvania
A. Check out “Financial Shenanigans: How To Detect Accounting Gimmicks & Fraud in Financial Reports” by Howard M. Schilit and Jeremy Perler (McGraw-Hill, $40); “What’s Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio” by John Del Vecchio and Tom Jacobs (McGraw-Hill, $36); or “Financial Intelligence: A Manager’s Guide To Knowing What the Numbers Really Mean” by Karen Berman and Joe Knight with John Case (Harvard Business Review Press, $35).
So you bought some “common stock” in a company that you expect will grow over the coming years. Excellent! You now have shares that may appreciate in value over time — and you have new rights, too.
For example, common stockholders typically have voting rights. Among other things, you get to vote for or oppose board members and can cast (generally nonbinding) votes on executive compensation. You may also have a say when a company is facing a big decision, such as whether to accept another company’s offer to merge with it (or, in some cases, whether to liquidate the company).
To help you decide how to vote — and decide whether to remain a stockholder, for that matter — you’re entitled to a close look at how the company is performing. Publicly traded companies in the U.S. are required to file quarterly and annual reports with the Securities and Exchange Commission (SEC), which are available for anyone to inspect. Such companies also must hold annual shareholder meetings, providing you with information in advance about matters to be voted on. Shareholders can often make proposals to be voted on, too — and many do, suggesting changes such as a greater focus on sustainability and/or changes in political lobbying and political contributions. Stockholders also have the right to sue, via shareholder class-action suits, in certain situations.
Note that along with common stock, companies also may issue preferred stock and bonds. Holders of those securities have different rights. For example, when companies issue dividends, preferred stockholders collect their due before common stockholders. And if a company lands in trouble and end up being liquidated, bond holders will be paid before preferred stock shareholders, and holders of common stock are paid last — if anything is left.
As an investor in common stock you do face the most risk, but you also stand to gain much more than other investors if the company performs very well.
My Smartest Investment: Defense Growth
My smartest investment has been in Lockheed Martin stock. I bought my shares when they were at $87, and they’ve more than quadrupled in value since then. — D.M., online
The Fool responds: They’ve actually nearly quintupled in value at this point — congratulations!
Despite an ongoing war in Ukraine, though, this major defense contractor has not been firing on all cylinders lately. Lockheed Martin’s last earnings report was disappointing, with revenue declining over 9% year over year, while operating profit fell more than 10%. In part due to a large pension settlement, net income plunged 83%. On the plus side, free cash flow improved by 8% year over year, with the company reporting cash from operations of $1.3 billion.
Still, there are ample reasons to be bullish about Lockheed Martin’s future. CEO James Taiclet noted: “Although revenue in the period was affected by supply chain impacts and the timing of customer contract negotiations, our cost management initiatives resulted in (profit) margin expansion. Moreover, our robust cash generation also continues to provide the resources to invest in building the foundation for future revenue and margin growth opportunities.”
Meanwhile, the company also has three contracts with NASA for work related to Mars missions, and it raked in nearly $12 billion last year for space work. You’re sitting on a big gain — dig more deeply into the company to see if you expect further growth ahead.
— distributed by Andrews McMeel Syndication