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                   I N V E S T I N G  B A S I C S
                     Wednesday, November 8, 2000

benjamin.rogers@enron.com
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ASK THE FOOL

-- Q. I'm embarrassed to ask such a basic question, but here
goes. What does it mean when I hear, "AT&T is up 2 1/2 today"?
Is that dollars per share, or what?

-- A. Don't be embarrassed. Most of us were never taught these
things in school. Asking about them is the only way to learn.

Prices of stocks are always in dollars per share. They're not
always in whole numbers, though. The world of stock prices is
full of fractions, all the way down to 64ths and occasionally
even smaller ones. So if the film editing firm Splice Girls Inc.
(ticker: SPLIC) is listed at 28, that means it last traded at
$28 per share. Similarly, 15 17/32 means 15.53125 or $15.53 per
share.

Another way to think of it is to consider how much total market
value the company has gained or lost with each price move. Find
how many shares outstanding the company has. (Do this via online
stock research tools, your newspaper or the firm's financial
statements.) Multiply that number by the share price. If SPLIC
has 200 million shares outstanding and drops by $2 per share,
the company has lost $400 million in market value.

-- Q. What are buy-side and sell-side analysts?

-- A. Buy-side analysts work in-house for institutions such as
mutual funds or pension funds. They study possible investments
and recommend which securities the institutions should buy or
sell. Sell-side analysts work for brokerages, trying to sell
their ideas to institutions. If an institution likes a
brokerage's research, it might do business (placing trades)
through that brokerage.

The research of sell-side analysts also makes its way to
individual investors, through brokerages.

Got some questions of your own for the Fool? Head to our Help
area or post your question on the Ask a Foolish Question
discussion board.
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INVESTING BASICS - THE EARNINGS YIELD

One way to think about what you're paying for a company is to
consider its price-to-earnings ratio, or "P/E." Another way is
to calculate its inverse, which is its "earnings yield."

Consider the example of Fryyndar and Ulf Scandinavian
Pharmaceuticals (ticker: FANDU), whose motto is "Vars+god och
sv,lj!" (That's Swedish for "Here, swallow this pill!") To
calculate its P/E ratio, you simply divide the current stock
price by the annual earnings per share (EPS). If its current
annual EPS is $3 and the stock is trading for $111 per share,
the P/E is $111 divided by $3, or 37. While 37 might seem steep,
it's not meaningful until you compare it with the P/E ratios of
industry peers and consider its growth prospects. A high P/E
means the market is assuming rapid growth. (Is that assumption
reasonable?)

To calculate Fryyndar and Ulf's earnings yield, just reverse the
P/E ratio, dividing the annual EPS by the current stock price.
$3 divided by $111 equals 0.027, or 2.7 percent. Compared to
risk-free Treasury bond rates of roughly 5 percent, this doesn't
appear to be a bargain. But remember: Whereas bond rates are
fixed, earnings typically grow. Imagine that FANDU is expected
to increase earnings by 10 percent per year. If so, in 10 years
EPS should grow to $7.78. Assuming we bought shares when they
were at $111, the earnings yield for us has now become 7
percent, considerably better. ($7.78 divided by $111 is 0.07.)

It can be instructive to see how long it takes for the growing
earnings yield to pass the current 30-year bond rate, which is
now about 5.5 percent. FANDU passes it in six years.

If your desired rate of return on your invested dollars is 15
percent, it will take FANDU 18 years to reach that target -- if
earnings actually grow at the estimated pace, that is. Perhaps
you can find another investment that will get you there more
quickly. With riskier companies, you might look for them to pass
your target rate sooner rather than later.

The earnings yield is just one of many investor tools. It can
help you think more effectively about your expectations for
investments.
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IN THE SPOTLIGHT

-- Learn more about the earnings yield in this classic "Fool on
the Hill" article.
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-- Another "Fool on the Hill" article takes a close look at some
myths surrounding Wall Street analysts.
http://www.fool.com/m.asp?i=186703

-- And now that we've raised some questions about analysts,
permit us to introduce you to our own. Frustrated with some of
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department of our own, offering a new kind of research on
companies for investors.
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A NOTE FROM THE AUTHOR(

I hope you're finding this product useful. The content
originally appeared as part of our nationally syndicated
newspaper feature (which I also prepare). Consider giving your
local editor a jingle and suggesting that they think about
carrying the Fool.
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Selena Maranjian
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