When it comes to investing in the stock market, the goal of any investor is to always buy low and sell high. This can be easier said than done because share prices of companies tend to be volatile during trading days and it may not always be able to work in an investor’s way to make money quickly. Therefore it’s important that investors rely on good fundamentals for long-term holds, and some good technical analysis for optimal entry points.
Volatility tends to occur more in growth stocks, which don’t typically have a dividend and whose prices strictly function on a supply and demand basis. This means that stock price movements typically are supported by either the company putting out news, earnings report numbers, and media attention. It is based on these events that the stock has the most intense movements. However earnings reports only happen once a quarter, and company guidance is usually given every once in a while.
Price to earnings ratio
Ultimately, what can help a stock move higher is on the basis of a price-to-earnings ratio of a stock’s multiple. The multiple is usually derived from a forecasted perception from analysts, and a higher P/E signals a higher premium for a stock because of a belief that the company will more than likely beat its estimates. With limited information coming in from the fundamental side though, the price can then only move up or down based on news coverage of company announcements, to get analysts to react and adjust their price targets.
Ultimately, companies that move high are ones that market themselves in a way that shows it is justified for investors to buy their stock at such a high multiple. For example, a company like Nvidia is widely regarded as one of the largest semiconductor companies in the market and trades at a forward P/E of around 46, which is considered very high from a historical perspective. However, the company has constantly been transparent in its product launch and has always been convincing to their investors in how popular their products are, that analysts are not afraid to keep raising NVDA price target.
How a Company Markets Itself
This can be looked at as how well a company markets itself, in regards to its target audience and consumer base, and industry competition and obstacles. A company that is transparent in what it does, and sells to its investors its capabilities tend to get investors to buy in early. Their hope is that even at a high multiple they can deliver on that promise which in return will help raise the stock price. A company will usually market itself in terms of its goals/objectives, and company guidance. Its ability to over market itself even without fundamentals allows it to trade at a high multiple.
Investors Can Lose Confidence
A company that overmarkets itself, puts its investors in a high-risk high reward scenario many times. When a company trades at a high P/E from their marketing, they usually continue to trade at the same or higher multiple when they consistently exceed investors’ expectations. A high P/E from a fundamental perspective can be risky, however, because at a high multiple from a fundamental perspective, a lot of assumptions are built into a price, and it may take many years for a companies balance sheet to reflect the present price it’s trading at. Any miscues or pullbacks from these promises will make investors lose confidence in the stock and pull out, which can greatly reduce the multiple it trades at and thus the price.
The Bottom Line Is to Make Money
Investors ultimately want to make money when they invest, and foundationally they have to go off fundamentals first. But without guidance or marketing, investors will always be afraid to buy a stock at a high multiple and, thus, the stock will trade closer to its present value than a price ceiling that’s exorbitant. For some investors, the hope is that they can buy in before a company starts trading at a higher multiple, because not only will a share price move up on earnings growth year over year, but a perceived inflection point in company growth. That’s why with growth names, it’s not just fundamental analysis that matters, they have to look at how a company chooses to advertise itself against their competition.