'Expensive' shares: Do not look at how high the share price is. It is the valuation that counts.

Quick Comment: 'Expensive' shares

Some time ago, I had a conversation with my ASX remisier based in Australia and I think some of his comments are worth sharing.

*Me refers to myself when I was speaking to him.
*Investssmart is also myself but from my point of view now.

Me: Good shares in Malaysia are expensive.
Remisier: What do you mean by expensive? When you say expensive, do you mean in absolute terms or in terms of valuation? When I say it is expensive, it normally means overvalued or fully valued. Some companies can trade at $30 but we still call them cheap.
Investssmart: This is very true. The word expensive should be used more carefully when talking about shares. The absolute value does not really count. A Mercedes for $100k is 'cheaper' than a Waja for $60k. It is the value that counts.

Me: Malaysians' perception is that the higher the share price is, the more it can drop.
Remisier: That happens all the time. It is important to remember that we should look at the movements in terms of percentage. If a $50 company can drop to $5, a $5 company can drop to 5c as well. The important thing is to fix the absolute amount you invest. Purchasing 100 shares in a $50 company is the same as purchasing 1000 shares in a $5 company. If both rise by 10%, you will still earn the same amount of $500 no matter which company you invest it. 
Investssmart: We should not be put off by the share price. It is the valuation that we should worry about. The chances of IRIS to drop from 90c to 20c is higher than the chances of BKAWAN dropping from $7.80 to $2. But somehow, if you give investors just these two choices, many would rather invest in IRIS because they think it is 'cheaper'!

Remisier: Do you remember me recommending you Rio Tinto ($30), BHP ($15), Woodside ($20) and Cochlear ($25)? You did not purchase any either! Perhaps, this changed your view on 'expensive' stocks!
Investssmart: These four stocks have skyrocketed since his recommendation. They are now about $75, $30, $45 and $50 respectively. Never say that upside of highly priced shares are limited. There is no such thing. Upside of overvalued/expensive shares is limited but upside of highly priced shares is not. Although I did not purchase these shares, it was not because I was scared of the high prices. It was mainly because I did not have the strong confidence in the commodity bull and sadly, I was proven to be wrong. Could have made tonnes more from the ASX. Nevertheless, in a bull market, almost everything on the ASX rose.


Me: I did not buy those few but I still bought some highly priced ones. What would I be trading if I don't buy any highly priced shares? I don't remember you ever recommending me any penny stocks!
Remisier: Good stocks are normally highly priced because the demand for good stocks is very strong. Lowly priced shares are normally those that are speculative or not performing. 
Investssmart: It is strange but true to a certain extent. Of course, it does not apply to all company shares.

Strange but could be true: I don't think it is a coincidence that most of the true blue chips throughout the world are trading at high prices. Most of these blue chips have been there for ages. It had to start off somewhere as a smaller company and it takes time to reach where it is today. If the company was trading at $1 ten years ago, it will probably trade at $10 today to be considered a top performer. Otherwise, it would not be considered a blue chip.

Fundamental based investors always look at companies that have excellent track records and therefore, end up investing in highly priced shares. That is because it is very rare that we can get such companies at low prices as share prices should have risen as companies perform well over the years. I doubt fundamental based investors would be interested in companies that trade at low prices over the last few years because that means that they probably do not have a good track record. Of course, this does not apply to all shares but I believe that it is true to a certain extent.



Conclusion: Do not look at how high the share price is. It is the valuation that counts.

http://investssmart.blogspot.com/2006_04_01_archive.html

Now that the price has fallen ....

"I buy cheap stocks."

Identifying "cheap" means comparing price with value.

What attracts your attention is that the price has fallen. 

Scrutinize the new lows list to find stocks that have come down in price. 

If the price is at a two or three-year low, so much the better.

Some brokers may call with suggestions.  These tend to be at the opposite end of the spectrum from the momentum stocks that most brokers are peddling.

Be especially attracted to stocks that have gapped down in price - stocks where the price decline has been precipitous.

Stock prices sink when investors have been disappointed, either

• by a recent event such as an earnings announcement below expectations, or
• by continued unsatisfactory performance that ultimately induces even patient investors to throw in the towel. 

Some investors put money in

• these companies with shares that have plummeted in price, and
• in those that have slid downward gradually but persistently. 

These companies can be in different industries, and maybe large, medium and small companies. The unifying them is that the stuff they buy is on sale.

Your Once-in-a-Lifetime Investing Opportunity

Your Once-in-a-Lifetime Investing Opportunity
By Chuck Saletta

December 3, 2008


"Panic" might be too weak a word for what's going on out there. It's not just that the stock market has been affected -- the far larger lending market has seized up as well. Banks don't want to lend to each other, much less those of us out here in the real world, and the bond markets remain off-limits to all but the strongest of borrowers.


And all of that is leaving everyone terrified. The long-term future simply doesn't matter all that much to a company that risks oblivion in the next week if it can't roll over its maturing debt or cover tomorrow's margin call.


The companies hit hardest by this mess have been the ones that were built on the presumption of easy, cheap, and unlimited credit. Homebuilders like Centex (NYSE: CTX) are in a world of hurt, and even the strongest automobile titans like Toyota (NYSE: TM) are feeling the impact of the credit crunch. But it was investment banks and financial institutions -- the largest and fiercest players on Wall Street -- that were literally ground zero for this implosion.


The list of companies brought down by the implosion -- Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac -- includes some of the most notable names on Wall Street. The list of companies struggling to survive the economic downturn grows longer by the day. And that's creating a once-in-a-lifetime investing opportunity -- for you.


It's your turn There are unbelievable bargains available now, the likes of which we haven't seen since the days of Benjamin Graham. Under less unusual circumstances, Wall Street's financial wizards would be leveraging themselves to the hilt to take advantage of the market's current conditions. But with their funds cut off, redeemed, or diverted into mere survival, they're forced to sit on the sidelines, rendered completely unable to act.
That's where you come in. As long as you have the patience to wait out the volatility, you can buy those very same bargains (without the leverage) and be richly rewarded when things return to normal.


The country, the stock market, and the strongest companies of the era survived the Great Depression. We'll get through this mess, too. Much the way Benjamin Graham and his protege Warren Buffett did after past catastrophes, the superinvestors of this generation will make their fortunes buying on the heels of this one.


Where to play



Even if you don't aspire to be the next Graham or Buffett (and don't have $5 billion sitting around with which to invest in a struggling company), there are plenty of bargains available to you right now.


But be careful out there -- not every company that has fallen is legitimately cheap. We're in the throes of a global economic rout, after all, and many companies deserve their slashed share prices.


Those whose prices have dropped as a result of forced selling or general market malaise, on the other hand, are the most likely to reward their shareholders for holding on through this mess.

They typically have

• Strong balance sheets,


• Reasonable or cheap valuations, and


• Moats protecting their core businesses.
  

Companies like these, for instance:
Company/Moat/Value proposition
Wal-Mart
(NYSE: WMT)
Unparalleled supply chain.Scale to leverage best prices.
Trailing P/E below 16;$5.9 billion in cash on hand.
Microsoft
(Nasdaq: MSFT)
So dominant, it's routinely classified as a monopoly.Nobody likes Vista, but they're buying it anyway.
Trailing P/E below 11;$19.7 billion in cash on hand.
Altria
(NYSE: MO)
In spite of knowing better, people still smoke.Government-enforced market-share protection thanks to master settlement agreement.
Forward P/E around 9;more cash on hand than total debt.
Oracle
(Nasdaq: ORCL)
Dominant position in database market gives it leverage in related business software categories.
Trailing P/E below 15;more cash on hand than total debt.
Verizon
(NYSE: VZ)
Captive markets for line-based phone services.Already built-out cellular network.
Trailing P/E below 15;total debt less than 1/2 of revenue.

Although these companies are likely to be affected by the U.S.'s newly declared year-old recession and the general tightening of consumer credit, their basic businesses are solid. Solid businesses, clean balance sheets, and cheap prices compared to intrinsic value mean these are the types of opportunities you should be taking advantage of right now -- while you still can.

This won't last forever

In ordinary times, companies this strong would not be available at such attractive prices. These deals are available only because the global financial meltdown has knocked out so very many of the institutional investors who would ordinarily bid these companies up much higher.

If you want to pay bargain-basement prices for some of the strongest businesses around, this is when you should pounce. It's not easy to buy when everyone is panicking, but it's precisely how generations of successful value investors have made their fortunes.

At Motley Fool Inside Value, we're taking advantage of the brief window we've been given -- and we're excited to buy companies like these at such reasonable prices. You can get a free, 30-day trial, with all of our recommendations but no obligation to subscribe, just by clicking here.
At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of Microsoft. Wal-Mart and Microsoft are Motley Fool Inside Value selections. The Fool's disclosure policy knows the corporate American Express number but isn't telling.

http://www.fool.com/investing/value/2008/12/03/your-once-in-a-lifetime-investing-opportunity.aspx



Also read:

http://financialfellow.com/2008/11/24/yet-another-reason-to-start-saving-for-retirement-early/