Money MythBuster: Popular stocks are always 'Buys'

Companies which tend to have low P/E, low price-to-book are unloved, and typically trade at lower prices and so over time produce higher returns

Ruth Saldanha 2 July, 2019 | 7:38AM

 

 

Mr. Morningstar Money Man (MMM): What are you doing?

Mr. Investor: Investing 

MMM: What are you buying? 

MI: More Netflix. 

MMM: Why? 

MI: Well – because it's popular. The price keeps going up, customers love the service, and Morningstar even says it has a narrow moat! So what's not to like?  

MMM: It’s popular, but that doesn’t mean it’s a good buy. 

MI: Why not?

MMM: Because, like you, everyone thinks it’s great, and everyone wants to buy it. Even a great company can be a bad stock investment if you pay too much.

MI: So the myth is Busted?

MMM: Not yet. Risk doesn’t fully explain stock market behavior. If everyone likes the same stocks, they will cost more, and paying 30, 40, or 50-times earnings is generally not a recipe for success.

MI: Busted now?

MMM: Not yet. Companies which tend to have low P/E, low price-to-book are unloved, and typically trade at lower prices and so over time produce higher returns.

MI: So I should buy a cheap company?

MMM: NO. When we look for stocks, we look for more than competitive advantage! Look for margin of safety, and valuation.

MI: Busted?

MMM: Yes! This myth is BUSTED!

About Author

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca