When to buy a stock: The 3 best times to buy stocks at a discount

If you study the Investment Quadrant, you realise that selecting a good company is only part of the equation. The final step is to buy a stock only when it’s trading at a low valuation. Remember, a good company can still be a bad investment if you overpay for it. So knowing when to buy a stock cheap is just as important as picking the right company if you want to earn good returns in the stock market in the long run.

So when are the best times to buy stocks at a discount? Here are three scenarios I personally look out for when it comes to finding undervalued stocks.

1. Buy when the index dips

When the index dips more than 20%, many times, it signals an opportunity to invest. This is because when the market falls as a whole, a lot of good companies get taken down for a ride as well, even though their business is still doing well. Therefore, a market crisis is usually one of the best times for an investor to increase his potential returns. Eventually, the stock market will recover, along with the share prices of these good companies.

Straits Times IndexHighLowDecrease
1997/98 Asian Financial Crisis249382766.8%
2000/01 Dotcom Bubble2582124151.9%
2002/03 SARS Crisis1808122932.0%
2008/09 Global Financial Crisis3875145662.4%
2010/11 Euro Debt Crisis3313252823.7%
2015/16 Chinese Stock Market Crash3539253828.3%

If you look at the table above, the Straits Times Index has declined by 20% or more six times in the last 20 years, which means there have been ample opportunities to participate in the stock market when stocks are trading at beaten-down prices. So the next time you see the stock market crashing, instead of panicking and running for the hills, slow down, take a deep breath and start to look for opportunities.

2. Buy during temporary trouble

The next best time to buy a stock is when the company is affected by temporary trouble.

Let me give you an example. Thai Stanley Electric is the market leader for automotive lights in Thailand. In 2011, the company was hit by two natural disasters. First, the 2011 Japan tsunami damaged the Japanese automakers, many of whom are Thai Stanley Electric customers. Second, the 2011 Thailand floods wiped out many factories in the country including Thai Stanley Electric’s. These two natural disasters back-to-back caused Thai Stanley Electric’s share price to plunge 35% in that single year.

Yet if you looked Thai Stanley Electric’s fundamentals, it was still the industry leader with a 95% and 55% market share in motorcycle lights and car lights respectively. The company had a net cash position with zero debt and was still paying a dividend despite the bad situation.

If you have bought Thai Stanley Electric during the time of the disasters, you would’ve made over 80% in just a year once the company recovered.

So next time you see a company hit by trouble, do your research and find out if the situation is temporary and whether the company can recover fully from the setback. If so, you might have an opportunity in your hands.

3. Buy when profits decrease in the short term

Oftentimes, when a company’s profits fall, its share price follows, and investors start to panic. Granted, a prolonged decline in profit is something to worry about as it may signal a deterioration in the company’s long-term competitiveness or a structural shift in the industry. However, if the fall is temporary or cyclical, it might be time to have a look.

Here’s an example. Premier Marketing is a Thailand-listed company that sells snacks and exports tuna. In 2016, Premier Marketing’s share price had fallen by 27% from a high of THB11.1 to a low of THB8.15. The fall in share price was due to the company’s poor 1H2016 performance — profit had decreased by 12%. It was only the second time in its listing history that Premier Marketing had reported a drop in profit. I decided to study the company’s fundamentals, understand why its profits had fallen and, most importantly, if the company could recover soon enough.

Premier Marketing produces a brand of fish snack called Taro which has a 70% market share in Thailand. As a regular visitor to the country, I personally knew that Taro is the most popular fish snack around and easily found in convenience stores and supermarkets everywhere.

Later, I found out the decrease in profit was due to two issues. First, weakening domestic consumption in Thailand was affecting Premier Marketing’s snack business and curtailed its growth. Second, sales from its tuna export business was affected by the economic slowdown in the countries Premier Marketing exported to.  By understanding the situation, we determined that company was likely to recover and the issues were temporary: the economy moves in cycles and there was no evident structural shift. On top of that, Premier Marketing had a net cash position with zero debt, and a track record of paying a growing dividend and a return on equity above 20%.

At the time of our research, Premier Marketing’s share price was THB8.30. This gave us a P/E of 12.30 based on average earnings and a dividend yield of 5%. It looked like an opportunity to invest in a good company at a reasonable price, which we did. Premier Marketing’s share price is now at THB13.50 (as at 22 September 2017), giving us a 77.30% gain, inclusive of dividends, from just one year of holding.

So next time you notice a company reports a drop in profit and its share price falls in tandem, go and take a look. If the company’s long-term fundamentals are still good and you determine, based on thorough research, that the decline in profit is temporary, it may be a good opportunity to invest.

Victor Chng is an equity investor and co-founder of The Fifth Person. His investment articles have been published on The Business Times BTInvest section and Business Insider. He has also been featured multiple times on national radio on 938LIVE for his views and opinions on how to invest successfully in the stock market. Victor is also the co-author of Value Investing in Growth Companies published by Wiley, Inc. The book can be found in all major book stores worldwide and on Amazon.com, Barnes & Noble and Apple's iBooks. On a personal note, Victor represented Singapore in the 2008 TAFISA World Games in Busan, South Korea and was the 2008 IFMA World Muay Thai Championships bronze medalist, kicking some serious ass along the way.

5 Comments

  1. wah siew

    September 25, 2017 at 9:50 am

    Good sharing Mr Victor Chng. Thanks and may you reap bountiful harvest in your endeavour!

  2. barnes method english

    September 25, 2017 at 5:39 pm

    that’s an excellent article, thank you

  3. Victor Chng

    September 25, 2017 at 7:57 pm

    Thanks guys!

  4. ShahrukhSRK

    September 26, 2017 at 9:34 pm

    Hello, Victor Chng, my main concern is how can i trade stock without swap deduction in long term buy holdings? Do you know any broker plz let me know?

  5. Deb Pearl

    September 28, 2017 at 11:04 pm

    I have never bought stock before and don’t really know how. That is good to know that when to know when to get cheap stock is just as important as picking the right company. I think I should do more research on the companies I want to invest in before I purchase stock. Thanks for the information!

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