What are some triggers to buy more of a stock? And how often? I am finding this hard especially once a stock has run a bit.
— Daniele Ferreira (@daniele_xyz) August 9, 2018
Firstly I find the stock. Quality is important as is growth prospects and I am not looking for 'hot' stocks or sectors. Boring with great potential and low current valuations with a potential holding period of a year to a decade.
Using Santova* (JSE code: SNV) as my example.
Non-asset based logistics company with their own software based in Durban. Always been very well run as witnessed by results and strong steady growth, both organic and by acquisition.
When I fist found it the stock was trading on a PE of around 5x with HEPS for the latest financial year being around 18c (price was 90c) and dividend of 2.5c.
I ask myself how easy to double that HEPS in 3-5 years? That requires growth in HEPS of some 15%-25% growth a year. For Santova, very easy.
Then I ask what a fair PE should be for this sort of stock? In the case of a logistics company I feel around 13x is fair with wild being 20x.
So if HEPS doubles (share price doubles) and PE moves to 13x from current 5x share price goes up another 160%. This takes a 90c stock to around 335c in 3-5 years.
Maths all adds up and I buy and wait. Often a very long wait hence I like a dividend to pay me while waiting.
HEPS growth comes in and slowly the PE starts to improve and HEPS is 44c for 2018 financial year while PE is now 9.7x and share price is 435c.
Do I add more? Well I do the same math again. Can earnings double in next 3-5 years (I think it can, meaning HEPS of 90c).
Has PE got space to expand? Yes I still think a 13x PE is fair which targets a share price of some 1170c.
Now a few extra thoughts.
As the story and price continue to keep playing out I keep on holding and adding.
A last point. What will trigger the stock to move and rerate higher? Sure HEPS increases helps but the PE can stay stuck forever and I need both HEPS and PE to increase. hence I especially like stocks that pay a dividend as this pays me while holding and waiting.
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