Have you ever looked at the best stocks in the market, the ones that have enjoyed sustained multi-year runaway uptrends, and felt like you have completely missed the boat?
I am sure you know the type of stocks we are talking about, they are the ones that enjoy near-monopoly status in their fields and always appear on face value to be ‘too expensive’ according to metrics such as price to earnings ratios.
The further these stocks run, the more you feel like you have missed out, and the less likely you are to buy, for fear of being the bellringer, the Johnny come lately who has bought the top of the market. The question is, how do we get on board these type of runaway stocks at a time and place that lessens our risk of buying at the absolute peak?
One train of thought here could be to wait for a broader market correction or crash. The problem here is that these types of premium stocks generally hold up a lot better than the rest in times of market mayhem, so whilst we sit and wait for the big correction, how much do we cost ourselves in the interim by not being on board?
In today’s’ lesson, with the benefit of hindsight, we are going to take a look into the rearview mirror at a few of these stocks, and in particular, the areas where we could have got onboard to catch that runaway trend that we thought we’d missed.
Anyone who has been around any type of market, even for a brief period of time, will know that when price moves, whether it be up or down, it does not move in a straight line. So, if price does not move in a straight line, how does it move?
In an up trending market, price will make its way higher by testing somewhere that it has not been before (a new high), before coming back, but not quite as far back as where it first came from, to form a higher low. For price to continue on in the same direction, this pattern will need to repeat itself, creating a stepping or zig-zagging effect to move higher. In a downtrend, the exact same process of price movement occurs, except in reverse.
So, how can we use this knowledge of how price moves to help us get on board a trending stock? Taking a look at the charts below, we can see the areas where price has poked its head up to test a new high (yellow on charts). On the flip side of the ledger, we can then see the areas where price has come back to test before continuing on (green circles on charts). With an anticipatory view, we can then see the areas where it looks most likely that we will get an opportunity to ‘get on board’ (orange circles on charts).
REA Group Ltd (REA ASX)
REA Group Ltd (REA – ASX) is the Australian listed multinational digital advertising behemoth whose primary activity is the operation of residential & commercial property websites. If you live in Australia and you have ever bought or sold real estate, then you’ve no doubt been a customer of REA’s. Having benefited from the first-mover advantage, the company’s realestate.com.au website is THE premier brand that enjoys near-monopoly status. In the past 12 years, the REA share price has come from levels around $1.00 per share to be sitting perched just under $90.00 at time of writing. Not a bad run!
Australian Stock Exchange Limited (ASX ASX)
The Australian Stock Exchange Limited (ASX – ASX) is Australia’s primary national securities exchange. As far as monopolies go, this one is close to the top of the tree. Could there be a more powerful brand than the one whose company name is the entire market itself, the ASX! The large majority of the population, whether they know it or not, is a customer of the ASX, whether it be via the buying & selling of shares directly, or as a passive customer as a by-product of having compulsory superannuation. Again here, as with REA above, we can see the areas where previous resistance on the run-up becomes new support on the other side, providing us with short-term opportunities of weakness to get on board the prevailing uptrend.
Commonwealth Serum Laboratories Ltd (CSL ASX)
Commonwealth Serum Laboratories, or CSL Ltd (CSL – ASX) as it is largely known these days, is a biopharmaceutical giant. The company specialises in researching, developing, manufacturing and marketing products to treat and prevent human medical conditions including coagulation disorders, viral and bacterial diseases, bleeding disorders and other diseases. Continuing the tear away share price story, we can again see the significance of previous resistance levels becoming new areas of support.
The Baron’s Brief – Official Summary
Price movement, whether it be up or down, does not occur in a straight line.
By looking at previous areas of resistance (yellow on charts), we can locate or anticipate new areas of support (green & orange circles on charts) where a stock has come up for air, a quick breather before continuing on in the direction of the prevailing uptrend.
The best stocks in the market, the ones with monopoly-like characteristics, often hold up better in times of market corrections or market mayhem than the rest.
The trend is your friend, do not be afraid to buy when prices are high with the view to selling when prices are higher.
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Disclaimer: The information contained in this article has been prepared solely for the entertainment & educational purposes of the reader and does NOT constitute financial or investment advice. Any examples presented in this article are for illustration purposes only. No person, persons or organisation are authorised or permitted by the authors to take any action on the reliance of this information without first consulting an authorised, accredited financial planner or advisor. The authors are entitled, at their sole discretion, to hold positions in the above-mentioned stock/s. The authors accept no responsibility for the accuracy, completeness or timeliness of the information contained in this article. Disclosure – No positions are currently held in REA – ASX, ASX – ASX, CSL – ASX at the time of publishing this article (This is a disclosure and NOT A RECOMMENDATION).