Hi Everyone,
many investors try to analyze economic data and figure out the best time to invest. You constantly read headlines like "is now the best time to invest?", "Should I sell all my stocks now?" and so on. I think this is unnecessarily complicating things and misses the point of investing.
The right approach would be to ignore the entire market and focus on individual stocks because these are much easier to analyze than national economies. What is sold in investment media as a buying strategy is not much better. I already wrote an article about why “Buy The Dip” is not a strategy:
Timing a stock is not precisely an approach that I follow, because I buy when I see value. But for every rule, you must know the exceptions. The first one relates to the buying timeframe when a stock is out of favor on Wall Street. We all know the rule “Don’t catch a falling knife”, but is there a way to know when the knife has stopped falling?
My personal indicator is a dividend cut from companies that have otherwise been paying rising dividends for many years. When a dividend cut is on the horizon or is announced we often see an additional selloff because the last men standing (dividend investors) throw in the towel. A dividend cut is usually the last straw for long-term investors who have been sitting on dead money for years and decide to sell.
When that happens, they'll sell to me.
The most prevalent reason for a dividend cut is a decline in the underlying business. When a company's earnings fall to the point where it can no longer support its dividend, the management team must lower the dividend. This is particularly common during recessions and other periods of economic collapse when company profits tend to fall as the economy contracts.
Other reasons for a dividend cut might be too much debt or a change in capital allocation policy (better use of money through acquisitions for example). Not all dividend cuts are bad, therefore each case needs to be evaluated separately. But nevertheless, investors panic when a dividend cut is on the horizon.
Instead of blindly buying after a dividend cut announcement, I put a stock on my watchlist, observe the company for the next 1-2 quarters, and decide afterward if I add it to my portfolio. There’s no need to hurry because once a company is in temporary trouble, it can take a few quarters until things turn positive and the price starts to move upward again.
The second indicator that I use is the announcement of growth initiatives. I wrote in a previous article that the press release section on a company’s homepage is always worth checking out because it tells you what is actually going on. Below is the article:
I differentiate between two types of expansion initiatives. One is a direct announcement in which the management states the goals they have set and wish to achieve within a specific time frame (like a 5-year growth plan; bonus points if they already have done it successfully in the past).
The second is an announcement of expansion. This typically involves constructing new factories or opening new stores in response to increased demand for their product. The great investor Philip Fischer wrote about this timing approach in his book Common Stocks And Uncommon Profits if I remember correctly.
As a rule, such announcements receive little attention, which plays into the hands of the clever investor. The management gives you a direct message about what is planned for the next few years and you can assume that the goals will roughly be achieved.
Final Thoughts
I know that I'm unlikely to buy exactly when a stock bottoms, but nonetheless, these two approaches give me a good range of several weeks in which I can buy. The dividend cut as the point of greatest pessimism and the growth initiative as the point before the results of it can be seen.
Until the next issue. 👋
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Disclaimer: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from my research. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice
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