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When To Buy A Stock: Three Signs It’s Time To Load Up On Shares


Are you wondering if it’s time to load up your stock shopping cart?

The Dow Jones Industrial Average is up well over 11,000 and investors are slowly returning to the market. The economy is gradually improving and economic activity is slowly on the uptick. You might be wondering if you should take the plunge and dip your feet back into the market.

To help guide you in your decision making, let’s take a look at three signs that it’s time to buy a stock.

1. The company is just selling way too cheaply.

The greatest investor of all time loves buying premium franchises at pauper prices. The stock market is not a perfect measuring tool and you can often find great companies trading at prices that are below their true value. Sometimes temporary negative events occur that will allow you to take advantage of the market’s mispricing.

A perfect example of this is with BP. Remember just a few months ago how everyone was in an uproar over the BP oil spill. The stock was absolutely crushed and shares were selling at $26 a share. BP is now out of the public spotlight and shares have rebounded back to $44 a share.

Prudent long term investors saw BP’s temporary problems as a perfect buying opportunity.

2. The stock is selling a price that is cheaper than its growth rate.

One of my favorite tools for valuing a stock is by looking at its past and present growth rates. A stock whose P/E ratio is well below its growth rates can be deemed to be selling at a discount.

Take Oracle for example. The company has been able to grow earnings at a 21% clip over the past five years. The company is projected to grow earnings at almost a 15% annual rate over the next five years. At $29 a share, Oracle’s stock currently trades at a P/E ratio just south of 15.

Oracle is a perfect example of a stock trading at its proper value with its price matching its earnings growth.

3. Fear and nervousness are running rampant in the market.

The best time to invest is when others are running scared. I have always found the best investment opportunities occur when everyone is saying that the world is falling. When doom and gloom reports are rampant in the market, you are probably near a market bottom.

Apple Inc. is a great example of this. When was the best chance to buy Apple’s stock over the past decade? It’s not now when the company has a ton of best seller products and the stock is over $300 a share. The best time to have bought the stock is when Steve Jobs returned to the company and the stock was selling for $3 a share.

Well, I hope that this post helps you with your stock buying purchases! Remember that temporary market events can create great buying opportunities.

What are the signs that you look for before making an investment decision?

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Comments

  1. #1 us my favorite way to select which individual stocks to buy, and I actually did purchase BP during the oil spill “crisis”. It had been beaten down so much, my belief was it would eventually rebound. I got it just under $30 per share a few months ago and it is now over $43, so it seems to have paid off. I’ll reevaluate after the one-year mark though.

    I wanted to do the same with Ford around a year or so ago when it was trading at $2-3 each share. Alas, I didn’t have enough discretionary investment money sitting around at that time and lost my chance.

    Most of my investing is directly into indexed funds, but I try to keep a small pool of discretionary investment money available for such opportunities.

  2. Great buy on BP. I missed Ford too. I should have loaded up when it was in the single digits.

  3. Can you elaborate more on how to determine growth rates? What is P/E ratio? Where do we obtain this information and how do we interpret it? Is P/E = 15 a good buy as in the Oracle case? Thanks for the great info!

  4. P/E ratio is the Price over Earnings. You calculate it by taking the share price and divide by earnings per share (EPS).

    It can be useful as a measure of determining whether a stock is a good value at the current price. Generally (and this is very generally as there are many other factors to consider) the lower the better.

    For example, assuming the EPS for a particular company would stay constant (which it never would) and all earnings were paid out the the shareholders as dividends (which it usually aren’t) the P/E ratio would equal the number of years it would take for the dividends to equal the initial purchase price.

    When evaluating a stock, I like to look at the inverse of the P/E ratio (I guess you could call that the E/P ratio). The resulting percentage gives you a rough idea of your annual return on investment (again that assumes earnings remain constant and all earnings are paid out).