Do you buy a high stock?
Putting money into the stock market can scare some investors, as no one wants to buy stocks when their prices are at their peak. So how do you assess whether or not this is the right time to buy? Is it wise to buy a high stock? Remember that even if you are an individual investor in stocks, there is usually a part of the market that presents a good opportunity to invest your money.
Is now the right time to buy stocks?
If you are looking to invest for your future, now is the perfect time to buy stocks. Waiting for a decline in stocks with a 40-year time horizon can be useless, plus if you are investing consistently over time, putting more money into your investments each month, you may end up hitting the jackpot one way or another
If you want to buy stocks, it can be hard to find good buying opportunities when the overall market valuation goes up, but that doesn’t mean they don’t exist. Warren Buffett once said, “I make no attempt to predict the market, my whole effort is devoted to finding undervalued stocks.” So it doesn’t matter what the market is really doing.
If a stock has a good price, it’s worth buying. Even if it declines in the short term, you have to trust your research and focus on achieving long-term gains. This does not mean that you have to ignore the company completely, but rather you must constantly ensure that your investment is still viable.
Growth stocks may tend to fall amid a market correction or crash, which is a catalyst for growth at times. Economic events that rock the stock market often present opportunities for companies with management teams that focus on long-term growth opportunities, so until your stock falters, it may come back stronger than before.
Some investors may fear a small decline in prices, believing that more losses are coming. In fact, it is more than likely a market correction, meaning it could be a great opportunity to buy stocks while they are temporarily discounted.
Should I buy a high stock?
As with everything in investing, we cannot determine the right course of action until we understand the reason behind it. In other words, we need to understand what is driving the share price in each case before we make our final decision. For more clarification, in this part of the article “Should I buy a high stock”, you will find 7 factors that you must take into account when buying expensive and high stocks, divided into good factors, good factors, and bad ones.
Good factors
1- Above average earnings growth
The best reason for the continued rise of high-priced stocks is the high level of underlying earnings growth. In this case, the overpriced stock has earnings growing at a rate that may make the current price look “cheap” at some point in the not-too-distant future.
The price-to-earnings growth ratio (PEG) is a great way to better reflect and analyze future growth. It is calculated by dividing the price-to-earnings ratio (PER) by the earnings per share (EPS) growth. In the case of Cochlear for example, the consensus PER for fiscal 2016 is 36.5 times, well above the market average of 15.1 times. However, the price-earnings-growth ratio is 1.2 times, which reflects the fact that earnings per share are growing at a much higher rate than the market.
It is possible to achieve above-average earnings growth in the short term without a sustainable competitive advantage, but this is not the case for achieving EPS growth in the long term, as it becomes imperative for the company to have a sustainable competitive advantage.
2- High quality earnings
The company may also trade at a high valuation as its earnings are considered to be “high quality”. There are many opinions about what determines high quality. Here are the most important ones:
- Consistency and certainty in earnings
- High percentage of recurring revenue
- Operating in a structurally sound sector with appropriate pricing strength, industry focus, and rational competitors
- Profit drivers fall within administrative control
- High gross and net margins
- Quite a few factors
3- The trend of stock prices
There is a body of evidence that shows that if the share price is in a specific direction (up or down), it is more likely to continue in this direction than to reverse, and this probability reaches 80%, which makes buying a share in an uptrend a “good” reason in se. However, investors often lack conviction, and volatility can scare investors out of a position.
4- Weighting the indicator
As a company’s stock price rises, so does its market capitalization, and thus the weight of the index. This may prompt fund managers to buy more shares if they are underweight. This additional demand causes the price to rise, causing the index to become overweight and thus increase demand. This can be particularly noticeable when a company increases in size to the point where it moves to a larger index (for example from the S&P ASX300 to the S&P ASX100). Buying the index can act as a force pushing up higher stock prices, but remember that it can work in the opposite direction as well.
bad factors
5- Media coverage and investment hype
Stock price movements are often driven by the amount of publicity a company attracts. Strong media exposure and investor and analyst hype can drive up stock prices in the short term. You should always look beyond the headlines and focus on the essentials.
6- Momentum trading
This refers to when someone buys a stock just because they think someone will buy it at a higher price. The stock may not be in a definite uptrend or there may be no tangible reasons for the stock to go up, but the buyer may simply think they can sell the stock at a higher price. But remember that history has proven time and time again that those who try to make money fast are destined to lose it.
7- Fear of missing out
Our desire not to miss out can drive our investment decisions, causing us to ignore other considerations. Although we may fight this feeling a lot of the time, we may finally give in and buy at the peak.
The key to success in this area is to identify the real driver of the share price, and the main reasons that drive you to buy. If your purchasing decisions are driven by emotion rather than profit growth, it’s time to reconsider your goals and strategies.
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