Tag Archives: NASDAQ:FB

Are High Return Investments Too Good to be True?

Who doesn’t want high returns on their investments? However, when something sounds too good to be true, it probably is. More specifically, when certain stocks deliver excellent returns, ask yourself what’s the risk behind them.

coins stacking higher and higher with plant behind each stack indicating growth of money

Here are some examples.

High Return Tech Stocks

Shopify (TSX:SHOP)(NYSE:SHOP) has got to be one of the highest return tech stocks out there. Here’s a chart that shows its total returns since inception compared to other big tech names.

Yes, Shopify stock kicked the butts of the FANG stocks, Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG).

SHOP Chart

SHOP data by YCharts

However, Shopify’s valuation is super duper expensive. At about US$200 per share, it trades at a blended P/E of about 500 and a PEG ratio of about 20.

Compare that to:

  • Facebook’s P/E of about 23.2 and a PEG ratio of about 1.5 at US$175 per share,
  • Amazon’s P/E of about 83.6 and a PEG ratio of roughly 1.4-2.8 at US$1850 per share,
  • Netflix’s P/E of about 120 and a PEG ratio of 2.4-3.9 at US$361 per share, and
  • Alphabet’s P/E of about 27.3 and a PEG ratio of 1.5-1.9 at US$1208 per share for GOOGL.

Surely, Shopify is growing at a super fast rate. For example, revenue growth was 59% in 2018. However, because of its astronomical valuation, it’s especially subject to an especially huge drawdown when we experience a market meltdown.

By the way, I don’t categorize the little correction we had from October to December 2018 as a market meltdown. In that period, Shopify fell from a high of about US$168 to a low of about US$120 for a drop of 28%. Imagine what a real market meltdown can do to Shopify stock (at least in the short term).

Biotech Stocks

Biotech stocks did very well for a long time. The long-term price chart of iShares NASDAQ Biotechnology Index (NASDAQ:IBB) illustrates the big picture.

Source: Google Finance with author annotatio
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5 Useful Tips for Successful Stock Investing

Some people think stock investing is gambling. It can be, but it doesn’t have to be. Stock investing won’t be gambling if it’s a sure win. There is a range of concepts you can apply to increase your odds of winning.

Here are some useful tips that can make stock investing a lucrative endeavour for you.

saving, investing, and compounding
Image attributed to ccPixs.com

Don’t Lose Money

This is easier said than done. To avoid losing money when you invest in stocks, first familiarize yourself with the topics around what makes a good business, fundamental analysis, and valuing a company.

I find learning about technical analysis helps. But identifying great businesses and trying not to overpay for them comes first.

Many investors share their investing strategies or why they buy or sell a stock through blogs or forums.

For instance, my friend recently invited me to join a Facebook (NASDAQ:FB) group, which had a focus on dividend investing. Of course, if you have more time on your hands, pick up a bunch of books about specific investing topics from the library or Amazon (NASDAQ:AMZN).

A good book for new investors is The Single Best Investment by Lowell Miller with a focus on Creating Wealth with Dividend Growth.

You can follow the people or groups that share stock investing ideas or strategies that interest you and learn over time.

Soon, you’ll be itching to apply your knowledge. If you want a sure-fire way to not lose money, experiment with a virtual account. I bank with Bank of Nova Scotia (TSX:BNS)(NYSE:BNS).

It offers a virtual trading account in which I can buy or sell stocks on the Canadian and U.S. exchanges like in a real account, but it’s for practice only. It starts you off with $100,000-200,000 of virtual money.

Key Takeaway: Preserve your capital. You need money to invest to make you more money.

Blue sky with cloudy words saying change. Grass field in background.

Business Valuation Changes

In the previous section, I mentioned about valuing a company. If you’ve done some reading on stock investing already, you’ve probably heard that you don’t want to overpay for even the best of companies, including Johnson & Johnson (NYSE:JNJ), one of only two AAA-rated companies.

The most common valuation metric of a stock is the price-to-earnings ratio (P/E).

As of writing, Facebook trades at $162 per share and in 2018 it reported earnings per share of $7.57. So, its P/E based on trailing-12-month earnings is 21.4. However, its P/E was close to 60 when it first started trading. Facebook’s 2019 earnings are estimated to remain stable compared to 2018’s. That’s why the stock is trading at a lower P/E. Longer term, Facebook is currently estimated to increase its earnings per share by more than 15% per year.

There are other things that can affect a business’ valuation, such as the debt levels of a company. If company A and company B are the same except that A has more debt than B, A will have a lower price tag than B.

Key Takeaway: Business valuations change as the underlying businesses change. Typically, lower anticipated earnings growth (or worse, negative earnings growth or a net loss) will cause stocks’ valuations to drop like a rock.

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Retire Early With These 3 High-Growth Stocks

Buying high-growth stocks can double your money faster. And now’s your opportunity to buy three such stocks at great valuations.

Since the stock market returns 10% (inflation included) on average, I consider high-growth stocks as companies which are expected to grow their earnings by more than 10% a year.

High-growth healthcare stock

CVS Health Corp (NYSE:CVS) was founded in 1963. It is one of the largest pharmacy benefit managers in the United States with nearly 80 million plan members.

CVS logo

Additionally, CVS is diversified by its more than 9,600 retail pharmacies, more than 1,100 walk-in medical clinics, and dedicated senior pharmacy care business which serves over one million patients a year.

After hitting an all-time high of US$112 per share and an outrageous price-to-earnings ratio (P/E) of about 23 in July 2015, CVS’s shares are finally trading at a decent valuation. It trades at a P/E of 15.3 at about US$87 per share.

Although CVS only yields 1.9%, it can continue growing its dividend per share (DPS) at a double-digit rate like it has for the last 11 consecutive years.

Its payout ratio is only 29% and coupled with growing earnings, its dividend is very safe. Analysts expect it to grow its earnings per share (EPS) by 12.2-14.4% per year in the next three to five years. Read More