Thank God we have maintained a diversified portfolio. Although we feel a bit queasy to see our growth stock holdings fall a lot recently, it’s nothing we’ll lose our sleep over. Besides, my stable dividend stocks have been resilient with some that have appreciated recently! That stability has helped keep us calm despite the growth stock volatility.
Here’s a comparison. Shopify (TSX:SHOP)(NYSE:SHOP) stock has fallen about 20% from its all-time high in about 2.5 months and ConvergeTechnologies (TSX:CTS) has declined about 26% in about 5 weeks.
While the main stock we’ll talk about in this article, Merck (NYSE:MRK), has popped about 15% in roughly 2 weeks. First, we’ll go over why we started a position in the dividend stock. Second, we’ll discuss why it recently popped.
Are you new to stock investing or an experienced investor who wants to improve their stock returns? Here are a few tips that should help.
Know yourself well.
Know your stocks well.
Know the stock market well.
I will include examples to illustrate the points.
Know Yourself Well as an Investor
Don’t know what stocks to invest in? Seek stocks that suit you in terms of your temperament and risk tolerance. You might need to test the waters to find your group of stocks.
One way to do so is by investing in a virtual account so that you won’t lose any real money if they turn south. If you can’t raise your enthusiasm from that, consider investing tiny amounts to get a feel of stock investing.
If you’re an aggressive investor and want high growth, consider growth stocks like Amazon (NASDAQ:AMZN), Alibaba (NYSE:BABA), and Tencent (TCEHY).
Conservative dividend stocks
If you’re a conservative investor, think about sticking with proven businesses. Personally, I find it’s easier to get started with dividend and value investing, which focuses on getting safe dividends and paying fair or better valuations for stocks.
One stock I bought earlier this month that falls in this category is TC Energy (TSX:TRP)(NYSE:TRP). It is a top 15 Canadian dividend growth stock with 19 consecutive years of dividend growth. Its 10-year dividend growth rate is 7%. TRP stock is already up close to 7% from when I bought it. However, it still offers a juicy yield of almost 5.4%, which is still attractive levels.
TC Energy operates a gas and liquids pipeline and power and storage portfolio. Buying the stock at discounted valuations (such as now!) has led to double-digit long-term returns. There’s no reason that this time will be any different.
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.
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).
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 did very well for a long time. The long-term price chart of iShares NASDAQ Biotechnology Index (NASDAQ:IBB) illustrates the big picture.