6 Signs of a Buying Opportunity for Stocks
“Buy low, sell high.” “Wait for a bottom to form.” “Buy in the dip.” There are plenty of old pieces of wisdom among investors when it comes to timing your entry into a position. But, as most experienced investors know, these adages are much easier said than done. Prospecting buying opportunities means keeping an eye out for signs and knowing how to interpret them, not just waiting for a price pull back.
Here’s a look at six signs of a buying opportunity for stocks and how to capitalize on them to get into a position that’s likely to show strong price appreciation in the future.
1. Growing Sales and Income
As a rule of thumb, investors should always check the company’s last two earnings reports before opening a position. If these reports show a positive trend in sales and income, it’s a strong sign that the company is on a positive trajectory. Ask yourself the following:
- Is the company profitable? If so, what is the profit margin?
- By what percentage are revenue and profits growing?
- What level of free cash flow does the company maintain?
- How do sales and income figures stack up against competitors?
Sales and income figures tell an investor many things. A business’ ability to generate sales and retain profits are the most important things for shareholders to look at. If these figures are healthy and growing, it’s a buying signal.
2. Positive Guidance and EPS Projections
As they report quarterly earnings, companies will also deliver guidance and earnings-per-share (EPS) projections. Investors should heed these forward-looking numbers, as they could signal a buying opportunity.
Positive guidance and strong EPS are generally a buying opportunity; however, it’s important to dive deeper. How does the company justify these projections? Are they event-driven or inherent to the company’s operations? It’s also important to recognize how a company frames its guidance and projections. For instance, a company might lower its quarterly EPS, but raise its annual EPS target. This could signal struggles in the near-term, but strength long-term.
Probe guidance and EPS projections to ferret out buying opportunities from companies that may not be as flashy as some other prospective investments. A company that can consistently beat its guidance and grow is one worth owning long-term, as opposed to a boom-or-bust investment.
3. Low Valuation Metrics
One of the best things an investor can learn to do is probe a balance sheet and understand financial metrics. Specifically, understanding valuation metrics can help dig up potential value plays and buying opportunities for companies trading for less than their worth. Some of the best valuation metrics to look at include:
- Price-to-earnings (P/E) ratio
- Price-to-book (P/B) ratio
- Price-to-sales (P/S) ratio
- Price earnings-to-growth (PEG) ratio
- Earnings before interest, taxation, depreciation, and amortization (EBITDA)
- Discounted cash flow (DCF)
There are many, many ways to evaluate a stock’s worth, especially by using these metrics in context. It’s advisable to understand them all individually and look for buying opportunities when several of these benchmarks signal that a stock trades below what it’s worth.
4. Share Buyback Authorization
When a company’s board of directors authorizes a share buyback, it’s typically because the company feels like its stock is undervalued by the market. Share buybacks will typically trigger a run-up in the price, which can make investors feel like they missed the boat. However, it’s important to understand the long-term potential for a stock after the buyback.
Fewer float shares means that each share is worth more and entitled to a greater percentage of the company’s profits as it returns value to shareholders. Buying the stock at a premium after the buyback pop could position investors for long-term benefits as they take advantage of everything from a growing dividend to strong share price appreciation over time.
Keep in mind that not all share buybacks are a good thing. Evaluate the company’s buyback in the context of its financial position and outlook. A company buying back shares specifically to return value to shareholders signals a buying opportunity.
5. The Company Introduces New Value Streams
Especially in the case of growth stocks and emerging companies, the creation of a new value stream is indicative of a buying opportunity. Any time a company finds more ways to generate sales and revenue, it’s likely that a period of growth will follow. Buying in at the outset of this new value stream positions investors to benefit as it scales.
This is also true for well-established companies that pursue merger and acquisition strategies. Folding established businesses, new IP or lucrative assets into the business means being able to capitalize on their cash-generating abilities. While M&A activity usually has a period of recuperation after the deal goes through, investors looking long-term will see the buying opportunity right away.
6. Technical Charting Signs
For those looking for more visual representations of buying opportunities, technical charting offers no shortage of possibilities. Become adept at identifying patterns and you’ll see buy signals early and often. Start with simple patterns like triangles, channels and double tops, before moving on to retracements like AB=CD, cabs, bats and Gartley patterns.
This also extends to candlestick patterns. Investors who can recognize bullish candlestick patterns like the bullish engulfing pattern, morning star doji, three white soldiers and more will find themselves in a position to capitalize on an uptrend in its earliest stages. Technical charting provides certainty against some of those old adages like “wait for a bottom to form.”
Pay Attention to Identify Buying Opportunities
Most buying opportunities come about as the result of investors paying attention to the right metrics. Acting on a hunch is likely to get you into trouble as an investor. Instead, look for signs that confirm your bullish sentiment and back it up with facts and evidence. Use the techniques above and create your own strategy for prospecting potential buying opportunities.
Keep in mind that these buying opportunities are for long-term investors. Day and swing traders and other short-term buyers will rely more heavily on technical indicators to call out buying opportunities. For those interested in buying and holding, use the above strategies to identify your next portfolio investment.