A colleague of a friend asked him about a specific stock, whether he would buy it. The stock was down about 10% from recent highs over the past two to three weeks due to a recent negative catalyst, and the colleague was considering buying the stock for his portfolio. The individual is a buy-and-hold, long-term investor, and I had no knowledge of what is in his portfolio. He doesn’t do much research, according to the friend, but instead relies on forums and news to “research” stocks to buy. My friend gave me the information and asked what I would do.
If you follow my blog or channel, you know that I’m not a fan of the long-term, buy-and-hold mentality for individual stocks. I believe a market index is a better tool for that philosophy. That’s not to say that I wouldn’t buy a stock and hold it for an extended period of time. My philosophy is that if I’m going to hold a stock, it should make me some returns while I’m holding it. That runs parallel to the buy-and-hold practice, and can coincide nicely with individual stocks, but it takes a bit more work than a buy-and-hold philosophy.
A quick analysis of the stock on Yahoo Finance showed that, yes, the stock was down 15% over the past six weeks, and they were in the midst of a labor strike that was dragging on the stock. But the stock was up 44% over the past year, compared to the S&P 500, up about 16% over the same period. The increase was not really supported by revenues and earnings, although those were upward bound. That information alone might have convinced me not to buy this particular stock at the time.
Another metric I use to value stocks is the historical dividend, if the stock has a dividend history. In this case, it did. The historical dividend for this particular stock was about 2.2%. The current dividend was 1.2%, and had just been increased last January. In order to support the stock price, the upcoming dividend increase would have to be 83% (to maintain the 2.2% long-term average). Over the last three years this company has increased the dividend a total of 38%, or an average of just under 13% per year, a nice increase to be sure, but not enough to convince me that this stock is a value at the current price and yield, or that the company will bring the dividend back to it’s historical level.
I explained to my friend that, while the stock might rebound from it recent woes, I was not convinced it would outpace the overall market. I would certainly not recommend his colleague buy the stock, at least not for a long-term, buy-and-hold portfolio, at this level and with the current catalyst unresolved.