I was thinking about my future investments and two names are currently under consideration – Medtronic and VF Corp. Both of these companies declined a lot from an all-time-high levels and underperformed S&P 500:
Both of these companies are not super cheap, but keep in mind that market is at all-time highs and it is hard to find any cheap company (at least if you are looking high quality one).
The problem is when is a right time to buy declining stock?
There are at least few answers (each good):
- Never, wait for change of trend
- At the bottom
- At reasonably high drawdown
Well, both companies are at reasonably high drawdown, but let’s think about the market and two possibilities:
- S&P continues rally
Well as in the last months shares of MDT, VFC were declining although S&P was going up then why should I expect trend to be changed?
- S&P is going down by 5-10%
Well, as general market is going down why should I expect these two particular names to go up? OK, you might say these are defensive stocks, like WMT below, but be realistic. Probability that these names will go up, when market is down is rather low.
So then is a right time to buy?
There must be some trigger. First and foremost it might be a good opportunity to buy 2-3 weeks before quarterly/annual results. Obviously I have no idea what numbers will be presented, but as stocks are down then potential risk that company miss consensus is low (declining share price means that expectations are low). Sure if results will be weak then further depreciation should follow.
Secondly maybe it is a good idea to wait for market to decline. I can imagine trading session where S&P is minus 2-3% and then MDT, VFC are going down. Then it might be a good idea to close your eyes and buy shares.
Thirdly if you are a long term investor maybe it doesn’t really matter? J If you are buying shares at 20-30% and in long term share price is rising, then another 2-3% better price (potential) is not worth consideration? I mean, OK, maybe you will get some better price, buy there is a risk that you will not invest as shares can go up immediately…
Summing up, it is not an easy task to find a right time to buy a declining share. Both names look attractive, but I think I will wait for general market to decline a little bit.
Disclosure: VFC, MDT – no position