When to Pull the Trigger on Stocks
Rob: People often ask me, how do you decide when to pull the trigger on stocks and how you evaluate companies that trade on exchanges? Let’s take a look at that question and get you some answers right now.
First of all, how are stocks measured? Well they trade on exchange, if more people are buying than selling the price goes up. If more people are selling than buying, the price goes down. The price that you see on the six o’clock news is the price of the last trade of the day.
Stocks have historically over time, traded based on a multiple of revenue or earnings. That’s why earning always drives stock price. Historically, they’ll trade anywhere from five or six all the way up to 20 and sometimes even significantly more than that. Senior companies, the companies that has been in this country forever and have solid growth and always profitable, they trade generally at a lower multiple than companies that are growing. For example, if we compare the financial sector, banks, insurance companies in Canada they will historically trade at a lower multiple, somewhere in the 12 range than grow sector such as technology, health care, those will generally trade on significantly higher multiple. Why? Because there’s a perspective future in growth. They might grow significantly more than banks next year. The market is willing to pay for that potential growth and that’s why the multiples will be higher.
The key when you’re looking at all these different sectors and all these different multiples is you wanna make sure that these companies have a solid backbone. And what’s that solid backbone? Well for us, we wanna make sure there’s strong management. Well established record of being able to generate profit continuously, year after year. We also want a company that has access to capital. Now whether that’s to the capital markets or the financial markets, we want a company that’s able access capital, strong management and is able to continuously drive earnings forward. So if we have that, that’s a very good road map for the stock we wanna own. So at the end of the day, we want to own companies that are profitable and are growing their profits year in, year out. Now if that company is doing that, every year it’s growing by 10 or 15 percent their profit, long run, the stock will reflect that, the price will show that. Now, today, tomorrow and next year it might be down but that’s noise. In the long run what we want is earnings growth and that’s what we focus on.
When to pull the trigger on stocks
At Tetrault Wealth Advisory Group when it comes to pulling the trigger on stocks here’s the straight talk. One, we don’t listen to headlines and we don’t get trigger happy. Two, we focus on fundamentals. Three, we have a plan in place ahead of time so we can prudently execute when opportunity comes knocking. Thanks for watching.