Finding the Best Moment to Buy
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Long-term investors usually focus their attention on buying the right companies, and the timing of the purchase usually takes a back seat in importance. That's understandable considering that when you are buying a stock to hold for many years you are looking for big movements over long periods of time, so timing is not as important as choosing the right company. On the other hand, some simple ideas can help you buy high-quality companies at reduced prices.
It's not necessary to make any complex chart analysis to find a nice entry point. Simply identifying high-quality companies to hold for the long term and buying them after an earnings miss is a very simple, yet effective, strategy to get better prices.
Investors need to do their homework, of course, since it's very important to be certain about the long-term fundamentals of the business in order to have to confidence to pull the trigger quickly when short-sighted investors sell a stock after a disappointing earnings report.
Apple (NASDAQ: AAPL) disappointed investors last October when the company, which almost always reports better than expected data, had lower iPhone sales and earnings per share than Wall Street analysts expected. Shares fell after the report, dropping from more than $425 in October to less than $365 in November of last year.
But management provided a very reasonable explanation for the earnings miss: with the new iPhone expected to be launched soon; many customers were postponing their purchases until the new product was available. This was a transitory phenomenon linked to the dynamics of the product cycle, and not anything permanent related to Apple losing its competitive position.
As it turned out, Apple reported two blowout quarters after that one and the shares are now trading above $600. The lesson is clear: if you are a long-term investor, taking advantage of negative earnings announcements can be a very profitable strategy as long as you are convinced about the company's fundamentals.
Something similar happened with Nike (NYSE: NKE) last September. The world leader in sports shoes and apparel reported better than expected numbers, but management and analysts were worried about lower margins due to rising input costs over the next quarters. Nike went from $90 to $82 due to the concerning guidance.
Looking at the situation with perspective, Nike has faced rising input costs through decades, and that hasn't stopped the company from delivering solid profit margins for its shareholders over time. It's not easy to rapidly translate higher costs into prices, but doing it over time is something that a company with an outstanding brand like Nike can certainly do.
In retrospect, that fall was a great buying opportunity. Seven months and two successful earnings reports later, shares of Nike are challenging their historical highs near the $111 level.
There are some names that are suffering in the current earnings season and they could be an interesting opportunity to buy on temporary weakness. Qualcomm (NASDAQ: QCOM), for example, seems to be one of those cases. Shares of the mobile technologies company fell by 6% after it disappointed investors in its earnings release last week.
The numbers were actually pretty good, even better than expected, but the company warned about having production bottlenecks in its 28 nanometer products, which could negatively affect sales in the following quarter. It's not good news to face this kind of problem, but as long as demand is strong the supply situation should get better over time, so this looks like a buying opportunity in Qualcomm.
The company is still one of the biggest beneficiaries from the mobile computing boom, providing chips and technology for Apple's iPad and iPhone as well as many products operated under the Android operating system. If there is any negative effect from production bottlenecks on Qualcomm's results it should be transitory by nature.
Having your ideas well researched in order to capitalize on transitory problems to buy at lower prices is not so difficult after all, but it requires patience and hard work. The Roman philosopher Seneca said: "Luck is what happens when preparation meets opportunity." That's a great quote about a concept that works pretty well in stock investing.
acardenal owns shares of Apple. The Motley Fool owns shares of Apple and Qualcomm. Motley Fool newsletter services recommend Apple and Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.