If I offered you Telstra Corporation Ltd (ASX: TLS) shares for $3.00 each, would you buy them?
How about $4.00?
What about $5.00?
Would $6.00 get you excited?
If you said "no" to $6.00, ask yourself why?
Maybe it's because the market price for Telstra was $5.80 at open this morning. Or maybe you simple don't think the business is worth that much. In that case, I agree with you.
As seasoned long-term investors will know, no stock is a buy at any price. Indeed when a company's shares sit above their 10-year high, it's a better time than ever to step back and reassess your position.
The only way to consistently outperform the market over many years, is by occupying a variant perception and being right about your thesis. However it can take years to be validated.
Put simply, if you truly want to do better than average, you must focus your attention on the 'out-of-favour' stocks. Not those trading over 10-year highs.
Should you buy, hold, or sell Telstra?
Now, I'm not saying Telstra isn't a great business. It is. But it's not a great investment today.
Telstra has a great mix of high margin defensive businesses such as mobiles, fixed data and voice. It also has a number of booming areas of business such as its Network Application Services, and an ongoing international expansion.
But what's the point of buying a stock when its future growth is already priced in? You may not realise it immediately but that maximises your downside risk and minimises your upside potential. The thesis holds true for big dividend stocks.
A fair price to hold, a good price to buy
At today's prices, I believe Telstra is closer to a 'sell' than a 'buy'. It trades well above my fair value estimate for the stock, which is approximately $5.00, and significantly higher than my buying price of around $3.97. To put that in perspective, Telstra traded in my range between 2005 and 2006, then again between 2008 and 2012.
There'll be no envy on my behalf if Telstra reaches $6.00 by Christmas, and it doesn't matter what P/E ratio or dividend yield the stock is trading on for my investment case. Until I see a price which I deem as good (or better), I'm not going to follow the crowd into a business which I believe is clearly not worth what investors are paying for it.
