When To Buy And Sell


When To Buy And Sell

When To Buy And Sell
The mechanism of​ buying and selling is​ quite easy .​
It is​ as​ easy as​ pressing a​ button in​ front of​ your computer screen .​
The question of​ when investors should buy and sell warrant a​ more detailed analysis.
When to​ sell: Ideally,​ we​ should sell when a​ stock reaches its fair value .​
There are 9 other reasons to​ sell but I​ won't cover it​ here .​
So,​ what is​ a​ stock's fair value? I​ have covered this plenty of​ time .​
But,​ in​ general,​ a​ stock reaches its fair value when it​ is​ yielding 3% above the​ current free risk interest rate .​
I​ am using 10 year treasury bond as​ a​ proxy for free risk interest rate .​
Currently,​ the​ 10 year bond is​ yielding 4.46% .​
Fair value of​ a​ stock is​ therefore when it​ is​ yielding 7.46% .​
Inverting yield,​ we​ then got the​ widely used Price Earning Ratio .​
Yield of​ 7.46% corresponds to​ P/E ratio of​ 13.4
When to​ buy: This is​ an​ easier question to​ answer .​
We,​ of​ course,​ should buy stock lower than we​ sell .​
If we​ sell the​ stock at​ a​ P/E ratio of​ 13.4,​ then we​ should buy it​ when the​ P/E ratio is​ less than 13.4 .​
How much lower ? It depends on​ how much return you aim for .​
If,​ say,​ you are aiming for 50% return,​ then your buying price is​ when the​ stock is​ trading at​ a​ P/E of​ 8.93 .​
If you are aiming for a​ 34% return,​ then your buying price is​ at​ a​ P/E of​ 10.
In short,​ we​ should buy at​ a​ P/E of​ 8.93 and then sell at​ a​ P/E of​ 13.4,​ correct? Yes,​ but with a​ lot of​ caveats .​
I've covered those caveats in​ 5 common misuse of​ P/E ratio .​
To emphasize,​ the​ P/E ratio used here is​ not trailing P/E ratio,​ does not ignore the​ value of​ cash in​ the​ balance sheet,​ does not ignore one-time event and does not ignore the​ change in​ interest rate .​
At this point,​ I​ am ignoring earning growth simply because the​ fair value calculation is​ for a​ company with 0% growth.
You might be wondering where you might find stocks that are trading at​ a​ P/E of​ 13,​ let alone 8.93 .​
Here is​ a​ few candidates to​ help you getting started .​
Seagate Technology (STX) has a​ forward P/E of​ 7.5 and $ 2.30 per share of​ net cash in​ the​ balance sheet .​
Western Digital Corporation (WDC) has a​ forward P/E of​ 9.75 with $ 2.65 per share of​ net cash .​
OmniVision Technologies Inc .​
(OVTI) is​ trading at​ a​ forward P/E of​ 10.3 with $ 5.30 per share of​ net cash .​
Magna International (MGA) is​ trading at​ a​ forward P/E of​ 9.72 with $ 4.58 per share of​ net cash.
Please note that this is​ not a​ buy/sell recommendation .​
You would do very well if​ you do your own homework.






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