This week’s question: What’s a good price to get into a stock that has moved up a lot? I want to get positions in NVDA and AAPL, but they have moved up so much already I am not sure the right price. — Ron
The first thing to understand is that price is what you pay, value is what you get. For example, consider the stocks ABC and XYZ. ABC may be priced at $100 while XYZ is priced at $50. To determine which is the better value, you need to assess their respective earnings. If ABC has earnings per share of $4 and XYZ has earnings of $1 per share, ABC is actually the better value despite the higher price. ABC trades at a price-to-earnings ratio of 25, while XYZ trades at a price-to-earnings ratio of 50. Therefore, it’s essential to focus on valuation and not be solely influenced by recent price swings.
An example of this is Nvidia (NVDA) this year. Despite a significant rally, the stock became cheaper based on forward estimates because the earnings estimates increased more than the stock price, resulting in a decrease in the multiple. By solely focusing on the increase in stock price, one would have missed the important point that the stock was actually a better value after the rally.
Valuation alone cannot predict short-term price action. Prices can go down as profit takers, who are more focused on recent gains than valuation, sell some shares. Therefore, it is advisable to buy a little bit at a time when the stock dips to lower the overall cost basis. However, if the stock doesn’t dip after the first buy, it can be considered a high-quality problem. Not violating basis is our discipline, but in certain situations, we have done so. Whether that’s the right move is ultimately up to the individual investor.
When determining the right level to enter a stock, you can use valuation metrics like the price-to-earnings multiple or dividend yield. Additionally, you can implement some technical analysis. Factors to consider when determining the right level include the market multiple, growth rate, historic trading levels, and the multiples of peers in the industry.
Regarding Nvidia and Apple (AAPL), we cannot provide individual investing advice on when or at what level to buy. However, these are the two names in the portfolio that we have designated as “own it, don’t trade it,” indicating that members should be strategic in choosing their entry points. It’s important to conduct your own analysis and also keep an eye on our alerts for further guidance.
As the earnings season continues, we will provide more insights on what to consider before and after earnings releases and conference calls. Remember that as a subscriber to the CNBC Investing Club with Jim Cramer, you will receive trade alerts before Jim makes any trades. Please review our terms and conditions, privacy policy, and disclaimer for more information. Please note that no fiduciary obligation or duty is created by receiving information from the Investing Club, and no specific outcome or profit is guaranteed.