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Motley Fool: Online marketplace profits

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The growth of global e-commerce is a megatrend worth investing in. In Latin America, one company is dominating the e-commerce market: MercadoLibre (Nasdaq: MELI).

MercadoLibre is like eBay and PayPal rolled into one – except it’s growing much faster. It operates a marketplace business (Mercado Libre), offers logistics services to sellers (Mercado Envios), provides loans to merchants (Mercado Credito) and has a fast-growing digital payments business (Mercado Pago). Revenue grew 74% year over year in the fourth quarter – down from the triple-digit percentages it achieved in 2020, but with plenty of room to grow.

So far, Mercado Pago has 28 million users in Brazil and great growth potential. And recently, MercadoLibre began offering a cryptocurrency trading tool, which may fuel more engagement with the app.

On the company’s fourth-quarter earnings call, CFO Pedro Arnt expressed optimism: “Even with the reopening of physical stores, customers in Latin America have embraced shopping online, paving the way for further long-term growth in the region.”

The market’s recent sell-off of tech sector and growth stocks has given investors a chance to buy MercadoLibre at a relatively cheap valuation: a recent price-to-sales (P/S) ratio of 8.2 – down from a P/S of 25 over a year ago. (The Motley Fool owns shares of and has recommended MercadoLibre.)

Ask the Fool

Q: If a company pays out more in dividends than it has in earnings, should I stay away from it? – C.H., Saginaw, Michigan

A: Not necessarily, but doing a little more digging into the company is a good idea. What you’ve noticed is referred to as a company’s “payout ratio” – the sum of its annual dividends per share divided by its earnings per share (EPS) for the year. A ratio below 1.0 (100%) means the company has enough earnings to cover its dividend obligations, and a much lower ratio usually reflects lots of room for dividend growth in the future.

On the other hand, a ratio above 100% reflects a company that’s paying out more in dividends than it’s generating in net income. That’s not necessarily bad, if the company has ample cash on hand to handle it and if it’s just due to a temporary problem – such as, perhaps, a supply chain issue. (If the company is facing long-term problems, it may end up reducing, suspending or eliminating its dividend.) A steep payout ratio warrants a closer look into what’s going on at the company.

Q: My mutual fund is apparently closed to new investors. Should I worry? – D.K., Keene, New Hampshire

A: Nope. Mutual funds will occasionally close to new investors for a time, if their managers find themselves with more shareholder dollars to invest than great ideas for where to invest them. This way, they don’t have to deploy shareholder money into second- or third-tier investment ideas. (Some funds will enact a “soft close,” meaning that they strictly limit new investments, usually to existing shareholders.)

My dumbest investment

Years back I was a total newbie, frequently searching online for “best stocks right now.” I ended up finding a tiny stock. In retrospect, I now see it was being artificially pumped (which is how I found it in the first place – someone was running ads about it). I stupidly bought $1,000 worth of shares, and sure enough, tripled my money in just a few days. I didn’t sell, though – again, I was a total novice. My loss is close to 100%.

I learned my lesson: I’ll never fall for another pump-and-dump scheme like that again, and if I end up riding any false wave, I know to jump off immediately. It was a hard lesson to learn, but a great learning experience in the long run. – E.S., online

The Fool responds: Don’t be too hard on yourself – even the best investors make some regrettable moves, and new investors can make many. That’s why most investors, new and experienced alike, can benefit by reading and learning more about investing.

As you know now, many penny stocks (those trading for around $5 per share or less) can be manipulated in “pump-and-dump” schemes. That’s where fraudsters hype the stocks to lure new investors into buying, sending the share prices up – only to then dump their own shares at the higher prices, sending the share prices down, burning the naive investors.