We all like to own stocks that are hitting new highs, but there is always that niggling feeling that after making a price peak a stock will fall. Our anxiety begins to put doubts in our mind. The fear of loss can be stronger than the hope for gain. The urge to buy is tempered by the perceived high price.
That's the fate of investors. Hope keeps us in positions that probably should be closed and fear keeps us out of potentially generous returns. One way to follow stocks is to let them run a little before starting or increasing a position. Some stocks can sell off 10%-20% after hitting highs even if they have the general momentum to keep going higher.
There can be many reasons why a stock sells off after hitting a new high. However, if they are going to continue upwards, then at some point the buyers will come back in.
If you have confidence in the company behind the stock and are in for the long haul, pullbacks are occasional buying opportunities – like store clearance sales to move product. When a stock sells off 10%, it requires an 11% gain to get back to its previous price. A 20% drop calls for a 25% increase to do the same. You can improve short-term returns by sticking with your favourite quality companies, but waiting for advantageous pricing.
Here are three companies that have, in my opinion, more room to run and have come back in share price recently.
Domino's Pizza Enterprises Ltd (ASX: DMP) is down about 12% since it hit a high of about $22 about a month ago. It has a 38 PE, so isn't in bargain territory, but it has strong growth potential with domestic and overseas store expansion in Japan.
Carsales.com Limited (ASX: CRZ), the leading car sales listing website, has taken on several acquisitions and investments to keep its earnings growth track record and net profit has almost doubled since 2010. It is about 13% off from its $12.61 high set in early March.
SEEK Limited (ASX: SEK), the employment placement website, rocketed up in mid-February from about $13 a share until it set an $18.54 all-time high in March. Since then, it is now $16.28, or about 11% lower. It also has a new investment in a Malaysian jobs website that will link up with its Singapore-based website business for expanded coverage in South East Asia.
Foolish takeaway
You have to know the companies that are making new highs before investing in them. Being cautious about the asking price is important because the price you buy at dictates what return you eventually achieve.
