How to Buy a Stock and Knowing when to Sell it
Hey guys, it’s been a while since my last blog post about “What is Interest & How Does it Work.” I’m back with some more golden nuggets to share in order to make you a better investor.
One of the most common question among beginning investors is how do I start start investing? For more experienced investors the question becomes; how do I know when to exit my investment? So I thought I would answer both questions with one example.
Knowing When to Buy – The story of Himax
About two weeks ago I saw a steep drop in the price of a company called Himax Technologies Inc. They were down over 10% and I wanted to investigate it further to understand the drop. I found this article where I saw some good signs and a few bad signs:
Pros and Cons
- Taiwanese microchip maker Himax Technologies Inc. said its second-quarter net income rose 29 percent as small and medium-sized panel driver sales increased.
- Himax chips are used in Google Glass.
- Beat earnings estimates with EPS of $.12 against estimated $.11
- Revenue climbed 9 percent to $207 million from $189.5 million. Himax said that this was its highest quarterly revenue since 2008’s fourth quarter.
- Small and medium-sized panel driver sales rose 32 percent due to sales from the smartphone sector. These sales made up 53.6 percent of the quarter’s total revenue.
- Gross margin improved to 24.6 percent from 23.1 percent on a better mix of products. It was the highest quarterly gross margin since 2008’s third quarter.
- Even though high revenue growth, Himax missed revenue estimates by $1 million (0.5%)
- Large-sized panel sales fell 19 percent because of lower sales to Innolux Corp., which shed its 15 percent equity stake in Himax in June.
The reason for the 10% drop
- Revenue is expected to fall 5 percent to 12 percent from the second quarter’s $207 million. This implies approximately $182 million to $197 million.
After looking at the pros and cons I realized that the downside was already in the price since the stock was down over 10% so I decided to take a small part of my Financial Buffer and invest in Himax.
As you can see, I shared my motivation for other people to follow my thought process and also to understand what level of risk I’m taking. The most important part of sharing your motivation is to keep track of your own investment strategies, to followup with the good ones and put the bad ones aside next time you’re looking to invest.
Dig deeper in your research
The next day I decided to make a deeper analysis (you can read more about financial analysis here.) I saw that their metrics such as PEG, Margins, and Revenue Growth all pointed to an upside potential in Himax so I decided to put in more capital in my investment. To finance it I dug in to the Growth Stock part of my portfolio.
Now I had plowed down about 10% of my portfolio in this investment and I was fully committed to this company. What started as a day-trade became a growth equity play for me instead.
Three days later the markets are painted red due to the debacle in Syria. This is what’s called “Market Risk”, it doesn’t matter how good your company is performing if the whole market is heading down. However, it also creates opportunities! It means that exactly the same company I was looking at three days ago is now trading at a 4% discount. As all portfolios should have, I had a small pile of cash ready in my account to act on this opportunity. I went in with more money to bring down the average price for my stocks (this is called cost-averaging)
After I made my third investment I had put in about 15% of my portfolio in this investment. That’s how much I believed in this company.
Knowing When to Sell
Today [read yesterday] updated research reports were released on Himax Technologies as can bee seen in this article. This made the stock soar 15% in one day.
Since I’ve already made a 24.3% gain and the analysts consensus were between $7.50 to $8.1 per share I decided to stay away from greed, take my profits, and invest them elsewhere as are more lucrative investments waiting out there.
24.3% gain isn’t bad after 2.5 weeks. Just as an FYI, to get a similar return on a good savings account you have to wait 11 years.
Seeing gains in your portfolio is always fun but being able to share the experience is even greater. Here are some other folks who followed me on this trade:
This is the main reason I started SprinkleBit, so people can learn how to let their money work for them in the best way possible. It’s a really rewarding feeling to see beginners learn and experienced investors thrive on SprinkleBit. I hope to continue the discussion with you all there.
P.S Today Himax soared another 17%. A lot of investors usually get sad that they missed the opportunity, where as I think of it as a good trade where the market acted irrational afterwards. It could easily have gone the other way.