If you’re going to buy companies when they are down on their luck and have share prices in the basement, then you have to accept a few realities.
First, uncertainty will be high. Stocks don’t get smashed when their industries are roaring and the future is certain. Bargains are had when there is peak uncertainty and shareholders are questioning everything.
Second, the company’s earnings will most certainly be garbage. Sales will have skidded and its EPS numbers will be nasty.
The third reality is key. If you’re going to wait for the uncertainty to ease and the fundamentals to improve, then you will have to end up buying the stock at higher prices.
Enter Mickey Mouse
The coronavirus crash and subsequent recovery this year provides a perfect case study. We could use one of a hundred stocks, but I want to zero in on Disney.
Think about the global pandemic and its outsized affect on all of aspects of the Walt Disney Company’s business model. Its parks segment was destroyed. Its cruises were cancelled. Movie releases were pushed back. ESPN and TV suffered too.
Fears of how the pandemic would alter the future of Disney took its share price down 48% from last year’s high. Peak uncertainty? You bet. The quarterly EPS in the quarter before the crash was $1.53. In the three announcements since, it’s gone from 60 cents to 8 cents to -20 cents.
Obviously, in that time, we’ve moved seven months closer to a vaccine and the inevitable end to the pandemic. If you were waiting to see a light at the end of the tunnel, then you now have it – especially after the recent Pfizer and Moderna announcements. But guess what? DIS is no longer nearly 50% off its highs. In fact, it’s almost fully recovered.
And if you’re waiting for earnings to rebound, then you probably won’t buy for another few quarters.
Do you see what waiting for more certainty has done to you? It’s caused you to miss out on the entirety of the recovery. Does that mean it was the wrong decision?
Yes – if you’re game was to try to bottom fish.
No – if you aren’t trying to hunt for bargains amid the wreckage of a bear market. But, that wasn’t the premise of today’s post!
Rather than waiting for the smoke to clear after a crisis and everything to return to normal, I suggest a more timely signal – follow the price chart. When the trend reverses from lower to higher, cast a line.
As far as the daily chart goes, I’d argue DIS stock turned the corner in May when it broke back above the 50-day moving average.
The weekly time frame took a little longer, but by July, a higher pivot low and higher pivot high had formed.
In either case, you were buying at much more attractive prices than the current $144.
For my own trading, I prefer to let the charts be my guide for when I should start looking to buy beaten-down sectors – regardless of what the fundamentals look like. Price almost always leads earnings anyways.
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