When I made my last 2 trades back in January (bought Lockheed Martin (LMT) and Gluskin Sheff (TSE:GS)), a reader asked me an interesting question:
Why did you buy 2 stocks at their 52 week high?
While reading the question, I almost felt like an idiot. I mean: who would buy any good at its peak price? Why would it be different when you invest in the stock market? Technically, we always aim to buy low and sell high. How can you make it happen when you buy at the highest price over the past 52 weeks?
My answer is almost too simple: I buy companies I like when I believe in their futures. The price history doesn’t mean much to me. I would rather focus on the future value of the stock and the current valuation of it. Historical trends are not for me.
Then again, this seems a bit simplistic and I don’t have a 10 year market case study to back my thinking. Let’s take a look at my trades in 2013 since the three of them were almost made at the 52 week highs.
Bought 45 Disney (DIS) on May 22nd 2013
Dividend received: $38.70
Stock appreciation: +$537.75 (+18.15%)
The first graph represents the past 12 months of pricing history for Disney. You can see that when I bought the stock (on May 22nd 2013), it was almost at its peak. The reason why I bought it was directly related to the DIS stock analysis I made right before trading. I believe the company had everything to continue shooting for new highs. I didn’t mind the low dividend yield as I saw growth in the first place. Let’s check what happen after I bought the stock:
As you can see, the stock was flat for a while and was even showing a negative return for a few months in a row (especially in August). However, upon new financial results, the company kept rising since September and hit a new record high in February. So far, I’m up 18% plus the $0.86 dividend per share that was paid in December. In this case, buying the stock at a 52 week high wasn’t a mistake.
Bought 30 McDonalds (MCD) on May 22nd 2013
Dividend received: $70.50
Stock appreciation: -$198.00 (-6.46%)
I followed McDonalds for almost a year before I bought it. The main reason why I was so slow with this trade was because I didn’t want to sell any of my current holdings to add MCD. When I finally made my choice to get rid of a few positions, I jumped on MCD while it was almost at its peak. You can read the reason why I bought MCD here.
After my purchase, the stock dropped almost immediately. Then, after posting disappointing results in 2013, the stock has continued downward slowly. To this date, I’m still in the red with this position even if I cashed a few dividend payments. On the other hand, I’m not too far from showing a positive return and the company is still in good financial shape to keep raising its dividend. MCD just did it again in November (from $0.70 to $0.81).
Bought 44 Wal-Mart (WMT) on August 7th 2013
Dividend received: $20.68
Stock appreciation: -$92.84 (-2.74%)
I bought both MCD and WMT (read my WMT stock analysis here) for the same reason: I wanted to add more consumer stocks to my portfolio. I was overweight in techno at that time and thought that moving a part of my portfolio towards long term dividend payers was a good move. I was more interested in growing my dividend yield over time than showing immediate profits with these two trades. Therefore, it was more a trade to adjust my asset allocation than anything else.
Fast forward to February 11th 2014, the stock shows a negative return of -2.74% and I’ve received a total amount of $20.68 in dividend. So far, this trade is also showing a negative return of a few dollars.
What’s my point: 1 Good trade and 2 Neutral trades
When I look at the 3 trades, I can say that buying a stock at a 52 week high isn’t a bad move at all. I have two neutral trades (meaning I’m not even down 5% in my portfolio) and 1 very good trade showing over 20% return including the dividend payout. Combine all 3 stocks in the same portfolio and I show a positive return after buying 3 stocks at their peak.
Therefore, we can conclude that it’s a lot more important to select the right companies for the future than buying one at their 52 week lowest price. I bought these 3 companies at reasonable P/E ratios. Another factor to consider, if the P/E ratio is not over 20, it means that the company is not trading at a ridiculous value. Please note there are stocks trading at very high P/E ratios that are still good investments but it rarely happens when you look at dividend paying stocks. If a stock keeps going up and it is mainly because profits and sales keep following the same trend, then it is only normal to pay a higher price than 52 weeks earlier, right?
But DivGuy, You Could Have Waited for a Pullback and Made More Money
Yeah… technically, if I had a crystal ball, I would have known that instead of buying DIS in May 2013, I could have waited for mid-August and bought it even cheaper. A similar gymnast could have found the sweet spot with MCD and WMT. But second guessing is only good for Smartass Party discussions.
To prove my point, I’ll take my two recent trades as examples: The purchase of 107 shares of Gluskin Sheff (TSES: GS) on January 14th 2014 and 22 shares of Lockheed Martin (LMT) on January 16th 2014. At that time, I bought both stocks pretty much at their 52 week highs:
Bought 107 Gluskin Sheff (GS) on January 14th 2014
Bought 22 Lockheed Martin (LMT) on January 16th 2014
Both stocks are showing a positive return in my portfolio a month after the transaction. Now… here’s my challenge to you:
Tell me Which Month in 2014 GS or LMT Will Pullback and Become a Better Deal
If you can’t answer this question today, well there is no point of waiting for a pullback. Someone waiting for a pullback on LMT has been waiting for over a year now and watched the stock rise 82% in the past 12 months… do you really expect LMT drop by that much this year or in 2015?
Still, I’m curious; does anyone have an opinion about when is the right time to buy GS or LMT this year? Personally, I would rather buy the stock at a high price today than wait to buy it at an even higher price tomorrow!Google+