Have winners run away from you, and you regret not having at least dabbled in their stocks?
Have you ever gotten stuck in a (seemingly) losing stock for a long time?
Have you bought into a stock that looked great, but you couldn’t add it at even greater prices because you ran out of money to invest?
These have all happened to me before. That’s why I’ve thought of ways to establish a position in my favourite stocks and to extend the time period I hold on to excess cash. I want to share this with you, so you can apply it to your situation.
Depending on what type of stock is at hand (e.g., value stocks, deep-value stocks, dividend stocks, growth stocks, speculative growth stocks, etc. — the categories are not necessarily in exclusion of each other), you might think about building a position in one or more of the following ways.
Establish a position based on the time elapsed
Winning stocks tend to continue winning. If you wait, they can run away from you like an athlete in a 100-metre-sprint race. Shopify (TSX: SHOP)(NYSE:SHOP) stock is a winner that has been in an upward trend since 2016.
If my memory serves me right, when Motley Fool recommended it in one of its services, Shopify stock was trading at about US$45 per share. At the time, the tech stock was trading near its all-time high. I wasn’t comfortable with speculative growth stocks at the time, so I ignored the stock … until it had more than doubled from the recommendation price.
Having bought the stock twice in 2017, it has been one of the best performers in my diversified portfolio.
For stocks like Shopify that have a strong upward trend, it may make sense to establish a position by buying, say, every three months, instead of waiting for lower prices.
Build a position based on the stock valuation
Stocks can stay cheap for a very long time. If you find a stock to be attractively priced, but it continues to be pressured, buy a piece of the stock now and buy more only if it becomes cheaper.
For example, I bought a piece of Intertape Polymer (TSX: ITP) last month as a value play. The stock is undervalued. The analyst consensus from Thomson Reuters has a 12-month target of US$18.10 per share on the stock, which represents a margin of safety of about 25% on a forward basis. In another perspective, this also implies near-term upside potential of +30%.
Value investors can consider buying the stock at a 25% margin of safety and buy more if it falls to levels of, say, 30%, 35%, or 40% margin of safety.
Build a position based on dividend yield points
After analyzing that a company’s dividend has good coverage, you can choose to buy the stock at desirable yield points. For example, Brookfield Property Partners (TSX: BPY.UN)(NASDAQ:BPY) offers one of the highest distribution yields in its all-time trading history. This could indicate the stock is undervalued.
Based on the chart, investors can consider Brookfield Property whenever it yields 5.5-6.5%. Right now, it offers a sustainable yield of +6.2%.
Investor takeaway
For the ways to establish a stock position discussed above, investors should determine the allocation of each stock before starting to buy. For example, I’m comfortable with owning Shopify for up to 1% of my portfolio. I can break down my buys over time. If $5,000 equaled 1% of my portfolio, I could buy about $1,666 of Shopify every three months to establish its position in my portfolio.
By establishing ways of building a stock position over time, investors can participate in winners sooner and have more cash on hand to potentially get lower average cost bases and higher average yields on their favourite stocks.
