Foolish investors know, no stock is a buy at any price.
We like to invest in good long-term stocks at great prices. It's possibly the easiest way to let your profits run and minimise downside risks.
It's a simple strategy that is currently in use by some of the greatest investors in the world, most notably, Warren Buffett. He has built-up his empire by finding stable businesses at times when others are fearful about those businesses. I'd find it hard to believe an investor could do the opposite and be successful.
Every now and again, it's important we consider what stocks have run their race or potentially become overpriced. This requires us to look objectively at the current price, fundamentals, and future prospects to arrive at an informed decision.
One group of stocks which have run their race are the big banks. Yes, that's Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC). Although I'm a big fan of ANZ's Asian strategy, I sold my shares last year. The banks are facing tighter interest margins, unemployment is heading up, bad debts are at all-time lows, and very few offer outstanding growth prospects in the near term. Coupled with an expensive price-tag, the big banks are to be avoided – for now.
From overpriced to serial underperformer. Qantas Airways Limited (ASX: QAN) might be undertaking a major strategic review but the question must be asked: "Why risk it?" The airline industry is extremely competitive, has low margins, is high risk, and companies stockpile huge amounts of debt. Even if Qantas could double in one or two years, there's plenty of other stable dividend paying companies which could do the same.
After an incredibly bad run last year, it appears now might be the time to buy gold miners. However, Newcrest Mining Limited (ASX: NCM) is not a company which I would buy for a rise in gold prices. It has incredibly high all-in sustaining cash costs, which makes its margins thinner than smaller miners like Silver Lake Resources Limited. (ASX: SLR). Newcrest will not pay a dividend this year and is facing a class action from shareholders. I'm not denying the company could rebound in 2014, but there are other alternatives with less debt and better growth prospects.
Foolish takeaway
Your portfolio only deserves the best, there is no reason to buy stocks at high prices or cross your fingers and pray for a turnaround story. Be picky and look past the allure of big dividend names to find stable and established businesses which have plenty of future growth ahead. Most importantly, make sure they're trading at good prices.
