Expensive company Investment?

Mark2016

Hi everyone. I am hoping that someone can help me understand when it comes to investing in companies that are considered expensive.

For example. A blue-chip company or any company’s share price may have dipped and it presents a buying opportunity in anticipation of it rising. However, a financial journalist says that the company isn’t cheap as its PE ratio is high. So basically the share price is lower than normal, but the company’s fundamentals suggest it is expensive and so the author says he will put the company on a watchlist for the present. My question is, why not take advantage of a drop in the share price even if the company’s fundamentals suggest the company is expensive? Can someone help me understand the rationale of not buying on a dip because the company is deemed ‘expensive’?

 

Many thanks.

MX5huggy

You don’t know it’s a dip, it’s just gone down and it can keep going down someone posted a video the other day never say “it’s dropped x it can’t go any lower”. 

I don’t invest in individual stocks you need an  edge I don’t have an edge. 

eskbanker

Mark2016 said:

My question is, why not take advantage of a drop in the share price even if the company’s fundamentals suggest the company is expensive? Can someone help me understand the rationale of not buying on a dip because the company is deemed ‘expensive’?

It'll always make more sense to buy based on where you think a share will go, rather than where it has been, so the 'expensive' tag effectively overrides the fact that it's priced lower than before, in the opinion of the person making that assessment.

ColdIron

In the nicest possible way, you might be better off with collective investments until you can properly evaluate individual company shares

tebbins

I don't buy individual stocks but the general approach is in 3 steps.

1. First you have to decide whether or not you want to own a particular business, based on how well you can understand what they do and the businesses future.
2. Then you have to decide what you think it is worth based on your estimates of its future earnings, cash flows or dividends.
3. Then decide if the current price is acceptable.

If you 1. want to buy a certain company, and 2. you think a reasonable value is £10 per share, and 3. The price falls 10% from £20 to £18, would you buy it? 

Albermarle

You are trying to beat the market by trying to buy low and sell high . Getting the timing right is difficult for the whole market and even more difficult for individual company shares . Unless you really know what you are doing, best to just regularly invest in funds that contain hundreds/thousands of company shares , like this one for example .
Vanguard FTSE All-World UCITS ETF USD Accumulation Key Statistics | IE00BK5BQT80 | Fidelity

Mark2016

I understand that some companies can be cheap/expensive and I know about PE and  PEG ratios,, but I don't understand the correlation between an expensive company whose share price has dropped.

jimjames

Mark2016 said:

I understand that some companies can be cheap/expensive and I know about PE and  PEG ratios,, but I don't understand the correlation between an expensive company whose share price has dropped.

What correlation? Prices go up and down all the time whether the company is viewed as cheap or expensive. Price going down may be due to the market overall, company news or something unrelated. I don't think you'll find any correlation between an company being expensive and the shares dropping 10% that predicts what happens next.

Mark2016

Why for example would someone be reluctant to buy shares in a blue-chip company which is deemed to be expensive due to its fundamentals even though its share price has dipped?

kuratowski

If I think the "true" value of a share is £1, it was previously for sale at £1.50 and has now dipped to £1.25, why would I buy the share believing it's still overpriced?

Mark2016

Good point. Thank you.