Investing is always a gamble, especially when it comes to stock markets. The lower the risk, the lower the return; the higher the risk, the higher the return — that’s pretty much the model of the stock market. I always say the key to investing wisely is to first determine exactly what your objective is and what type of an investor you are. When investing, I usually ask myself a few questions to help me determine that:
- Am I looking to invest in a stock/commodity for a year or less or for the long haul (three to five years or longer?
- How do I want to play the market — higher returns but higher risk — or play it safe and get stable but lower returns?
These are probably the two most important questions for an investor when starting out.
While it is arguable that it’s not a great buy for several reasons, including the fact that the company cut its dividend earlier in the year from $1.16 to $0.72 per share, I still consider it a reliable buy — for patient investors. That’s the keyword.
If you are looking at the stock from a “trading” perspective — to make a quick buck, trade in and out of the share in a short time period — then this company is certainly not for you. However, if you are looking at the stock from an “investing” perspective, i.e., buying and holding on to the stock for a number of years, then TransAlta is a great option.
Despite everything that went against the company, it has still met its guidance. The stock has recently been trading around its 15-year low. And while that may naturally make many investors nervous practically, this would be the ideal time to buy the stock in terms of valuation since it is selling at the cheapest cash flow (P/CF) multiples in about 25 years.
But what makes TransAlta promising is that Alberta’s purchase power agreements (PPAs) will begin to expire between 2017- and 2021, which would mean a huge increase in cash flow for TransAlta. Analysts at research firm Morningstar say that at current market prices this could add about $400 million to the company’s earnings (EBITDA).
In my opinion, this is very promising for the company and its shareholders. But remember, if you invest in the stock today, you have to be very patient in order to reap the profits.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Sandra Mergulhão has no position in any stocks mentioned.