When a Stock Has Been Surging, How Do You Know If It's Still a Buy?
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NEW YORK (Real Money ) -- Paying up for shares that have already made big moves can be tempting. Short-term traders prefer stocks in uptrends, as they have positive momentum. Investors, though, should wait for real value before committing their finite capital.
How can you recognize value. Look for price-to-earnings ratios well below average for the same stock and a yield, if the company pays dividends, that is higher than typical from that company.
Data on these metrics can be found on numerous sources. I prefer Value Line research sheets because they present 10 to 15 years of information on just one sheet of paper.
Discount retailers Kohl's (KSS - Get Report ) and Wal-Mart (WMT - Get Report ) provide good examples of how to verify "normal" valuations in order to pinpoint good entry and exit points.
At its 2007 peak, KSS traded for an excessive multiple while
paying no dividend. The stock got somewhat pricey again near the end of 2009. Buying or holding at those high valuations proved painful.
Kohl's quote on Wednesday was still lower than at 2007's pinnacle.
There were many chances to own Kohl's at discounted P/Es. The best of those periods added yields above 3% to the mix. Few people were loving the stock when it clearly was on the bargain rack.
Traders like it now, at close to $76, simply because it has moved up about $27 from its 2014 bottom. Getting in now might be too late. The current valuation offers less than great value based on historical data.
A return to average metrics would suggest $10 to $13 per share of risk.
Wal-Mart exhibited a similar, somewhat differently timed, pattern. Traders who paid up for WMT in the summer of 2008 as a defensive play ended up needing 3½ years to start making money.Source: www.thestreet.com