Sky rocketing stocks -- What is the right price?
Investors' dilemma is that they want to participate in the tech rally but the numbers look too high. While many of these gravity-defying stocks aren't worth their current prices, a few are. Here's how to tell the difference and when to buy them.
First, when a stock has stratospheric valuations, there's a reason: extremely high expectations. Investors expect the company to perform in an exceptional way in two areas: growth in revenues and growth in earnings. The challenge for investors is to discern which of these high-flying stocks deserve their attention.
Look for a stock that is essential, better performing. Does that mean you just buy the stock and hope? Definitely not. It does mean you start to monitor it and when the stock misses an earnings report or doesn't grow revenues fast enough, you look to buy. That takes patience. There's also the risk that the company won't make a misstep, and you won't buy it. If it happens that way, it will be the first company in history to do so. Granted the level may be much higher than the current one when you finally buy it, but the value of the stock may be much better. In other words, the P/E would be lower than the current levels.
The characteristics of the stocks you want to focus on are:
Market leaders who dominate their niche. The big tend to get bigger, win more contracts and have the largest R&D budgets.
Earnings that are growing, at an increasing rate, every year.
Revenue growth that exceeds the industry average.
Competing in an high and long-term growth oriented industry sector.
When you find all of these factors in a stock, it won't be a cheap one. But if you want to own it, sometimes you have to pay more than you would like. Currently, that's the entry fee for owning the best stocks in the technology areas. If you are patient and wait for some time you can pick some scrips at a relatively good price.
The key to making the big money with these stocks is to own them for a long time, letting them continue to grow. Even if you buy only a few shares, over time you can do very well as the stock grows, splits, and grows again. Many Infosys shareholders started with 10 shares and now own hundreds. When you buy a great company, you own part of it, so having a small piece of a great one is much better than owning a lot of shares in a loser. If you're interested in making the big bucks, add some sky-rocketting stocks to your portfolio.
Discount sales in most sectors Buy at a bargain.
There are lot of good stocks available at bargain prices. There are ways of finding the stocks, which are currently out of favor.
First, look for stocks that are out of favor for a temporary reason.
Second, look for stocks within sectors that are currently out of favor.
Third, use the tight screening methods to bring stock into your "Watch List" Here are some of the parameters to use and benchmarks to begin your search:
P/E ratio: Use a minimum of 10 and a maximum of 30. With current P/E ratios closer to 30, stocks with low P/Es can sometimes signal out of favor stocks. When you find these, make sure you're reading all the latest news items and check the analysts' thinking at ICICIDirect.
Price-to-Sales Ratio: Also called PSR. This is a macro way of looking at a stock. Many investors like to find stocks with a PSR below 1. It's a good number to start with, so put in .5 as a maximum and leave the minimum open. Be careful though, because many stocks will always carry a low PSR. You're looking for the stocks that have historically been high and are temporarily low.
Earnings growth: Look for atleast 20 per cent. If you can find a stock that has its earnings growing at 20% and its P/E at 10, you've got something worth investigating further. This is known as the PEG or P/E-to-Growth ratio. Sharp investors are looking for a ratio well below 1. In this example, the stock would have had a PSR of .5 (10/20).
Return on Equity: Start at 20% as the minimum and see who qualifies. The return on equity tells you how much your invested rupee is earning from the company. The higher the number, the better your investment should do.
By using just this combination of variables, you can find some interesting stocks. Try to squeeze your search each time you screen by tightening your numbers on each variable. And when you do find a stock, make sure you read all the relevant information from all the stock resources on the Web.
Should you buy more if the stock you own keeps climbing?
You can buy additional shares if your stock advances 20% to 25% or more in less than eight weeks, provided the stock still shows signs of strength
Cracking Buying Points
Here are some buying points for your reference
1. Strong long-term and short-term earnings growth. Look for annual earnings growth for the last three years of 25% or greater and quarterly earnings growth of at least 25% in the most recent quarter.
2. Impressive sales growth, profit margins and return on equity. The latest three-quarters of sales growth should be a minimum of 25%, return on equity at least 15%, and profit margins should be increasing.
3. New products, services or leadership. If a company has a dynamic new product or service or is capitalizing on new conditions in the economy, this can have a dramatic impact on the price of a stock.
4. Leading stock in a leading industry group. Nearly 50% of a stock's price action is a result of its industry group's performance. Focus on the top industry groups and within those groups select stocks with the best price performance. Don't buy laggards just because they look cheaper.
5. High-rated institutional sponsorship. You want at least a few of the better performing mutual funds owning the stock. They're the ones who will drive the stock up on a sustained basis. 6. New Highs. Stocks that make new highs on increased volume tend to move higher. Outstanding stocks usually form a price consolidation pattern, and then go on to make their biggest gains when their price breaks above the pattern on unusually high volume.
7. Positive market. You can buy the best stocks out there, but if the general market is weak, most likely your stocks will be weak also.
Cracking Selling Point
The decision of when and how much to buy is a relatively easy task as against when and what to sell. But then here are some pointers, which will assist you in deciding when to sell. Keep in mind that these parameters are not independent pointers but when all of them scream together then its time to step in and sell.
1. When they no longer meet the needs of the investor or when you had bought a stock expecting a specific announcement and it didn't occur. Most Pharma stocks fall into this category. Sometimes when they are on the verge of medical breakthroughs as they so claim, in reality if doesn't materialize into real medicines; the stock will go down because every one else is selling. It's then time to sell yours too immediately, as it didn't meet your need.
2. When the price in the market for the securities is an historical high. It's done even better than you initially imagined, went up five or ten times what you paid for it. When you get such a spectacularly performing stock, the last thing you should do is to sell all of it. Don't be afraid of making big money. While you liquidate a part of your holding in the stock to get back your principal and some neat profit, hold on to the rest to get you more money; unless there is some fundamental shift necessitating to sell your whole position. To repeat do not sell your whole position.
3. When the future expectations no longer support the price of the stock or when yields fall below the satisfactory level. You need to constantly monitor the various ratios and data points over time, not just when you buy the stock but also when you sell. When most ratios suggest the stock is getting expensive, as determined by your initial evaluation, then you need to sell the stock. But don't sell if only one of your variables is out of track. There should be a number of them screaming that the stock is fully valued.
4. When other alternatives are more attractive than the stocks held, then liquidate your position in a stock which is least performing and reinvest the same in a new buy.
5. When there is tax advantage in the sale for the investor. If you have made a capital gain somewhere, you can safely buy a stock before dividend announcements i.e. at cum-interest prices and sell it after dividend pay out at ex-interest prices, which will be way below the price at which you had bought the stock. This way the capital loss that you make out of the buy and sell can be offset against the capital gain that you had made elsewhere and will hence cut your taxes on it.
6. Sell if there has been a dramatic change in the direction of the company. Its usually a messy problem when a company successful in one business decides to enter another unrelated venture. Such a decision even though would step up the price initially due to the exuberant announcements, it would begin to fall heavily after a short span. This is because the new venture usually squeezes the successful venture of its reserves and reinvesting capability, thus hurting its future earnings capability.
7. If the earnings and if they aren't improving over two to three quarters, chuck out the stock from your portfolio. To get a higher price on a stock, it needs to constantly improve earnings, not just match past quarters. However, as an investor, you need to read the earnings announcements carefully and determine if there are one-time charges that are hurting current earnings for the benefit of future earnings.
8. Cut losses at the right level. But do not sell on panic. The usual rule for retail investor is to sell if a stock falls 8% below the purchase price. If you don't cut losses quickly, sooner or later you'll suffer some very large losses. Cutting losses at 8% will always allow investors to survive to invest another day.
However, this is not exactly the right way to do it. Some investors have certain disciplines: take only a 10% or 20% loss, then get out. Cut your losses, let your winners ride, etc. The only problem with that is that you often get out just as the stock turns around and heads up to new highs. If you have done your homework on a stock, you will experience a great deal of volatility and a 5 to 8 % move in the stock is part of the trading day. To simply get out of a stock that you've worked hard to find because it goes down, especially without any news attached to it, only guarantees you'll get out and lose money. Stay with a good stock. Keep up with the news and the quarterly reports. Know your stock well, and the fluctuations every investor must endure won't trouble you as much as the uninformed investor. In fact, many of these downdrafts are great opportunities to buy more of a good stock at a great price, not a chance to sell at a loss and miss out on a winner.