What does the Club consider the minimum improvement in cost basis before buying more shares? Thanks, Tim As with many investing issues, the answer is, “It depends.” The two biggest things to keep in mind: you don’t want to keep buying shares at the same price; and you want each purchase to matter — meaning that it would materially lower your basis and/or provide you with a more attractive yield than your last buys. The reason we can’t provide a hard-and-fast rule is that each stock has its own characteristics. The volatility of a stock, its valuation, investor perception, along with near-term factors (earnings, industry data, an upcoming shareholder event) all play a role in a minimum pullback before putting more money to work. Consider a stock that trades in a tighter range or has a lower valuation, like Morgan Stanley (MS). We would use “narrower scales,” meaning a smaller decline in percentage terms below your cost basis might do the trick. Large drawdowns just aren’t as frequent in a Morgan Stanley as in a high-flyer like, say, Nvidia (NVDA). Indeed, a stock like Nvidia, which tends to be more volatile and trades at a premium valuation, “wider scales” — or larger declines on percentage terms below your cost basis — would be warranted before buying more shares. Volatility in shares of a company can be easily observed over time. But one measure that might help more casual market observers is a stock’s “beta,” which measures its historic volatility versus the overall market (generally measured by the S & P 500 index). A beta of 1 would indicate that the volatility of the stock is on par with the broader market. A beta above 1 indicates more volatility than the market. And, a beta below 1 would indicate less volatility. According to FactSet, Nvidia has a 52-week beta of 1.88, indicating it’s been about 88% more volatile than the broader market average. So, a 1% move (up or down) in the S & P 500 would, in theory, result in a 1.88% move in Nvidia. On the other hand, Morgan Stanley’s 52-week beta is 1, indicating about the same type of volatility as the market. As fundamental investors and avid market watchers, we look more to valuation metrics to figure out when to buy. That starts with a stock’s multiples and, if relevant, its annual dividend yield. We like stocks that return a portion of free cash to shareholders via dividends. Another consideration is any upcoming catalysts, which may prompt us to be a bit more aggressive with our buys as we want to build up the position ahead of an investor event. On the other hand, the lack of a near-term catalyst may have us remain a bit more patient, thinking that there’s no rush as the lack of catalysts may limit near-term upside and could result in further downside. Valuation multiple When analyzing a valuation multiple, we like to compare to peers and historical values. That gives us a sense of whether a stock’s decline in price is a reflection of lower value, or a sign of a short-term market or industry dynamic. Take our recent buy-the-dip purchase of Halliburton (HAL). In our buy alert , we wrote: “Even if we were to take a 25% haircut to the consensus EPS estimate of $3.05, HAL shares would still trade at a cheap multiple of a little more than 12x.” That’s a pretty major discount in the multiple (the amount you are willing to pay in stock price for every dollar of earnings) versus the 17 times earnings level stock has traded at over the past five years. The magnitude of the decline was also noted — with shares at the time down 13% on the week due to a decline in oil — because Halliburton’s revenues are not directly tied to the price of the commodity. So, we thought the magnitude of the HAL sell-off was unjustified. For example, we picked up shares of Emerson (EMR) on the dip on March 17, pointing out that the stock price was trading at a 10% discount to its peers despite a similarly favorable revenue and profit profile. Our focus was on valuation. It helped our cost basis because even though the stock had been lower in price, we were able to buy the same strong earnings for less. There are also times when we will look to the dividend yield for guidance and determine what the next rate to lock in is and use that to determine the stock price at which we will add. Let’s say we last picked up a stock when it sported a 3.5% dividend yield, we might decide to hold off until we can lock in a 4% yield. To determine what level that is, we would simply take the annual dividend payout and divide by our 3% target yield. For example, if the stock pays out a $3 per year dividend and we want to lock in a 3% yield, we would know that we have to wait for the stock to hit $100 ($3/0.03). (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
What does the Club consider the minimum improvement in cost basis before buying more shares?
Thanks,
Tim
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