As the saying goes, at any given price a stock is a buy, a hold, or a sell. It's an important concept to grasp as it goes to the heart of a mistake which is all too often made by investors – overpaying.
While the underlying fundamentals of a stock are unlikely to change dramatically from month to month, the price a share trades at is almost always (sometimes extremely) more volatile than the fundamentals would suggest.
This volatility means that an investor buying shares in a stock a few days, weeks or months later can end up paying a significantly different price for a company which fundamentally may not be worth any more or any less than it was previously. This of course is the beauty of investing – the opportunity to gain from mispriced stocks.
The following three blue-chip stocks are all trading near their 52-week highs and each has outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the past 12 months. Some investors are no doubt kicking themselves that they didn't buy these stocks earlier and perhaps wondering if they should still buy them today. As always, the key question to consider is – will you receive more than you pay? In other words what is a conservative valuation and can you buy for less?
Toll road owner and operator Transurban Group (ASX: TCL) is an impressive business that just received approval from the Australian Competition and Consumer Commission to acquire the Queensland Motorways Group. This is an appealing acquisition for the group and comes just after Transurban announced it had executed an agreement to acquire the Cross City Tunnel in Sydney. These are both major acquisitions for the group and if executed well could add substantially to future earnings.
Last week Westpac Banking Corp (ASX: WBC) approached its all-time high of $34.98 which it reached in October 2013. The stock has now approached the $35 level three times in the past year and on the first two occasions the stock has subsequently retreated back to around the $30 mark. While determining the value of Westpac will not be achieved from looking at its share price chart, given the apparent lofty valuations of bank stocks its failure to move higher could be a warning sign for investors that there is little value at current levels.
Macquarie Group Ltd (ASX: MQG) appears to be entering a sweet spot as capital markets show signs of life with numerous initial public offerings (IPO) believed to be waiting in the wings. Couple the potential flood of IPOs with the buoyant equity markets and Macquarie's business units are finding themselves flush once again. Given the leverage an investment bank such as Macquarie has to these markets it's easy to see why Macquarie just provided guidance for FY 2014 of a 40% to 45% increase in earnings on FY 2013.
Foolish takeaway
In the case of Transurban and Macquarie there are reasonable grounds to suggest that the value of both these blue-chips has changed as acquisitions and outlooks have improved significantly. However in the case of Westpac the fundamental underlying value may not have changed much at all.
