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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