Should you buy high, sell higher?

Q: THE MARKET has been hitting record high the past few days and I don’t know if it is still a good time to buy now even if shares have become expensive. Should I join the current bandwagon or wait for share prices to come down? – Veron Detaro by e-mail

While it is true that several stocks are already trading near historical highs, it does not follow that you must refrain from investing and simply wait for share prices to crash before you start buying again. The rise in share prices means investors are willing to pay premium on expectations that stocks will go up further in the future.

Market investors justify buying stocks at a high price when they expect earnings to do better than consensus. Higher earnings prospects make stocks look cheap even though share prices are expensive in absolute terms due to declining P/E valuation.

Last month, I wrote in my column entitled “Bull run up ahead?” that falling oil prices might prompt adjustment of earnings upwards and support the market to eventually breach the 7,400 resistance, which was seen as a significant breakout that could set off another bull run.

Well, on Jan. 14 at a time when the column was published, the market broke out of the 7400 level with conviction and never looked back. This positive change in fundamentals that signaled a bullish turning point to register a new record high provided the maximum financial opportunity. The market has gained as much as 4.5 percent since then and is more than half way now toward our initial target at 7,860.

Entering at this point in the market may not be ideal for everyone. As the market slowly approaches upward, the risk also increases that share prices may be due for massive profit taking soon. If you are the conservative type of investor who likes to play contrarian and is always looking to buy stocks at bargain prices for the long term, you will be better off avoiding the market for the meantime and wait for your opportunity to buy when stocks have finally fallen to prices that you want.

But if you are the type who is willing to take bigger risks for higher returns, you can try to take advantage of the current market volatility by buying good stocks based on momentum. Good stocks are those with solid fundamentals that have great prospects of earnings growth this year and next. So how do you know which ones are promising?

One shortest way to look for stocks that enjoy strong momentum can be found in the 52 week high list. Most of the stocks in this list are presumed to be good because there is no reason why the market will be paying these stocks at record prices if there is nothing great that is going on inside. Of course, there are also small cap stocks that have been trading near their 52-week highs but you have no immediate way to validate. So, to be safe for this purpose, let’s get the list of stocks that are part of the PSE index.

Investors who pay at 52-week high prices believe that the stock is undervalued given its expected valuation based on positive changes in fundamentals. Once the market realizes the impact of this positive information, more people will buy into the stock and create a strong momentum that will eventually send the stock breaking its 52-week high and soaring to higher prices.

Most of the stocks in the PSE index are already approaching their 52-week highs. The top stocks that are nearest to their 52-week highs are Ayala Land (98.5 percent), Robinsons Land (97.9 percent), SM Investments (97.4 percent), Universal Robina (97.6 percent), Aboitiz Power (96.7 percent), BDO Unibank (96.6 percent) and BPI (96.2 percent). These stocks are perceived to be strong by investors and may get stronger in the coming weeks if the market will sustain its uptrend.

If you find these stocks a little pricey, you can check the second group that may play catch up in the next few days. These stocks have reasonable P/E ratios and wider elbow room towards their 52-week high. These are Aboitiz Equity Ventures (93.8 percent, 16x), Metrobank (94.5 percent, 18x), Meralco (92.9 percent, 17x), Megaworld (94.5%, 7.6x), Metro Pacific Investments (95.7 percent, 17x), Globe Telecom (88.3 percent, 19x) and PLDT (84.9 percent, 18x).

Investing in a fast moving market like this requires careful planning. Develop your strategy by setting your buying and selling thresholds to minimize risks. Identify the stocks that you want to own and buy it at every opportunity of price pullback. When the stock goes up, sell it at the target price you wish to unload without compromise. If your stock falls below your costs by 8 percent to 10 percent, protect your capital by cutting your losses immediately.

These rules may look simple to understand but not easy to execute. You must have strong mental discipline to manage your emotions when you are losing or winning. Sometimes you may easily get carried away when you are excited or terrified that forces you to make the wrong decision.

Buying for bargain stocks is a good strategy but it is not always a guarantee for profitable investing. Stocks that trade near its 52-week low may have valid reasons to fall that can possibly push the share price lower as much as stocks that move toward their 52-week highs.

It is actually easier to find strong stocks in an up market than in a down market because you can already confirm the positive trend and what you can do is simply buy on strength and ride on it.

Henry Ong is a Registered Financial Planner of RFP Philippines. To learn about value investing in stock market, attend the globally recognized Accredited Financial Analyst program on Feb. 21 to Mar 28. For more details, inquire at [email protected] or text <name><email>
<AFA> at 0917-3464126.