Tuesday, August 28th, 2007
You don’t have to buy fallen stocks to get value
The best way to make money in the stock market is to buy stocks for less than they’re worth.
That usually means buying stocks after they’ve made big falls.
But momentum stocks create value in another way: time.
Companies with fast-growing earnings are undergoing rapid change: orders are surging on a daily or weekly basis, flowing through to big increases in profits.
Things move fast in the modern world: when Apple’s iPod hit stores, there would have been strong indications that it was going to be a hit. But it would have taken time to realise the sheer enormity of the success.
Analysts and fund managers are usually conservative and often underestimate rapid increases in sales and profits.
That underestimation creates opportunities: if a stock has made strong gains but then drifts sideways for a few months near new highs (often when the broader market is correcting) it may look expensive.
But what if earnings are surging at the same time? Chances are the price isn’t reflecting that profit acceleration, so value is on offer.
What usually happens next is the market realises profits will be higher than expected and pushes the stock out of the range so it breaks out, which is a good time to buy.
So getting value in the market doesn’t necessarily mean catching falling knives and buying plunging stocks.
This entry was posted on Tuesday, August 28th, 2007 at 10:15 am and is filed under Value Versus Growth. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
