An investor is one who intends to build long-term wealth through ownership of fundamentally good stocks. These stocks are the ones that have built a track record of growing their profits consistently and have tangible plans to sustain their growth in the future. However, finding a good stock is just the first step. The next step is about timing. This is because an investor knows that a good quality stock is only a good investment if its price is undervalued. Here, I will share three instances when it is ideal to buy and accumulate shares of a good stock. A…
An investor is one who intends to build long-term wealth through ownership of fundamentally good stocks. These stocks are the ones that have built a track record of growing their profits consistently and have tangible plans to sustain their growth in the future.
However, finding a good stock is just the first step. The next step is about timing. This is because an investor knows that a good quality stock is only a good investment if its price is undervalued. Here, I will share three instances when it is ideal to buy and accumulate shares of a good stock.
A Crash in the Stock Market
Prices of good stocks may fall in a stock market crash. Have they become bad companies? No. Are they bad investments? No.
On the contrary, they would have become more attractive to investors. Why? First, we must understand that stock prices drop if there are more ‘sellers’ selling the shares than ‘buyers’ buying.
For instance, in an economic downturn, there would be more people facing financial difficulties and might need cash to meet their obligations. This would cause some people to sell their investments. As such, the price decline in a good stock has nothing to do with its fundamental performances.
However, speculators who have no regards to a stock’s financial standings would panic and dispose of their stocks. They would cause prices of good stocks to decline further. From an investor’s point of view, this is a golden opportunity to accumulate shares of good stocks in bulk when their prices are low, so that they would enjoy high dividend yields and capital growth when the stock market recovers.
P/E Ratio < 15
If I have a business that is making $1 million a year, how much are you willing to offer me to take over my business?
If your offer is $15 million, then, your offering is based on price-to-earnings (P/E) ratio of 15.
If you offer $50 million, your offering is based on a P/E ratio of 50.
Which is a better deal? Obviously, it is $15 million over $50 million as it is cheaper for you as an investor. Hence, it makes sense to buy good stocks when their P/E ratio is at their lowest, not at their highest. It would be insane to prefer a stock where its P/E ratio is 50 to another stock that has a P/E ratio of 15.
Dividend Yields > 6%
If you are investing for capital gains, please do not dismiss the investment potential of a dividend stock. It is erroneous to think that you cannot enjoy capital growth from investing in dividend stocks.
Today, with market uncertainties, stocks that are cash-cows and pays out excellent dividends are demanded by investors. They include retail investors, mutual funds, insurers, and even pension funds. Why? This is because they are conservative and risk-averse in nature and are seeking stable cash returns from their investments.
In general, stocks that can pay 6% in dividend yield are desirable as they are higher than current rates offered by fixed deposits and bonds.
The Foolish Takeaway
Unfortunately, the three ideal instances to buy good stocks do not last forever as savvy investors will grab them. As more ‘buyers’ buy these stocks, their prices would increase and make them less attractive to new investors.
We believe we've identified a dividend dynamo whose financials are strong enough to qualify its dividend as "safe" - and have profiled this stock in a research report that's now available to download completely free of charge. Simply click here to claim your copy today!
If you want to learn more about investing and to keep up to date on the latest financial and stock market news, you can sign up for a FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore.
Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.