Home Smart Investing 3 Tips You Can Use to Buy Stocks on the Cheap

3 Tips You Can Use to Buy Stocks on the Cheap

Most investors would love to have good companies in their portfolio.

But when everyone agrees that the company is worth owning, valuations may be pushed up, making shares costly to buy.

As optimism and high expectations buoy up the share price, it may seem a futile effort to try to buy the shares cheaply.

In such a scenario, you may face a dilemma — should you continue to wait for an opportunity to accumulate the stock more cheaply, or just bite the bullet and buy now?

One option may be to nibble on the shares first to start a small position while leaving room for more additions in future.

After all, share prices do get beaten down now and then.

These reasons may or may not be related to the company’s fundamentals.

As investors, we should always stand ready to pounce on such opportunities so we can pick shares up on the cheap.

Here are three instances where you can scoop up great bargains.

Temporary negative event

Some businesses may face an adverse event that may temporarily depress earnings or dent the company’s reputation.

Such an event may include a lawsuit, scandal or bad news that’s specific to the company in question.

Depending on the severity of the event, it may open up a golden opportunity to acquire shares of great companies on the cheap.

A caveat though — you need to assess if the scandal or bad news may permanently impair the company’s ability to function normally or grow over time.

If the event is judged to be temporary and the company can recover from it, then you can conclude that the shares are selling for a song.

An example of this is the “Salad Oil Scandal” back in 1963.

This involved a company Allied Crude Vegetable Oil Company which took loans from American Express (NYSE: AXP) and provided its salad oil as collateral.

However, the scam came to light that year when it was discovered that the containers were filled mostly with water and that over US$175 million worth of salad oil was missing.

Allied Crude ended up filing for bankruptcy, which meant that American Express (Amex) was left holding the bag for the missing inventory.

Amex’s share price plunged 50% because of this scandal, and Warren Buffett, then a young investor, famously purchased a 5% stake in the company when it occurred.

He had camped out at a restaurant he frequented and noticed that people continued swiping their Amex cards, thereby concluding that Amex’s reputation remained intact.

The scandal had created a great opportunity to load up on shares of a strong company that was suffering from temporary troubles.

Mauled by the bear

A second method you can rely on to acquire affordable shares is during a prolonged bear market.

Although bear markets do not occur frequently, it does pay to conserve some cash in case one comes along.

Such a market is characterised by pessimism, low valuations and cheap share prices as companies struggle to cope with plunging demand and falling profits.

Both Singapore and the US just experienced a sharp and sudden market crash back in March when news that the pandemic was worsening gathered pace.

There was indiscriminate selling as the baby was chucked out along with the bathwater.

Coupled with margin calls, valuations and share prices were pushed down to ten-year lows.

A poor quarter

Analysts at brokerage firms are in the business of forecasting what a company’s earnings will be like in the next quarter.

When reality does not live up to expectations, a vicious sell-off may ensue.

Short-term traders and punters make use of such forecasts to take advantage of volatility in the share price to make quick profits.

As long-term investors, you can also take advantage of such situations.

If the fundamentals of the business remain intact, a poor quarter is not going to invalidate the company’s long-term investment thesis.

No company can claim to post growth every single quarter without any hiccups.

So, the next time you witness a short-term adverse share price reaction due to missed quarterly earnings expectations, you can shell out a bit of money to buy up the shares for the long haul.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.