Although it may not seem like it all the time, the share market is pretty efficient.
For a great majority of the time, it puts a fair price on a company's stock.
Indeed blue chip stocks, such as Telstra Corporation Ltd (ASX: TLS) or Woolworths Limited (ASX: WOW) will rarely move into 'bargain territory' because so many analysts will be covering the stock and computing their fair value very day.
So it's up to individual investors to determine a good price to pay for a company and be patient. The price should be one which allows the downside to be minimised yet maximise the upside potential.
Sure, you might miss out on some gains here and there. But investing is as much about saving money as it is making it.
When stock prices aren't cheap – such as now – it's important for every long-term investor to remember Warren Buffett's famous words. "The stock market is a no-called-strike game. You don't have to swing at everything – you can wait for your pitch."
That's why I'm not stuffing Telstra shares (or any of the aforementioned companies) into my portfolio. Indeed, I believe the market is currently overvaluing Telstra stock and there are a number of warning signs investors need to understand.
For example, its share price is currently at a 10-year high, having doubled since 2010. Since then, cash flow per share is lower, earnings per share are up 21% (although around 15% is due to the recent buyback), and book value per share is up only 8.9%.
Its dividend yield has gone from over 10% fully franked to 5.2% fully franked and revenues have increased just 1.2%.
Buy, Hold, or Sell?
I think Telstra is a great business but its price leaves much to be desired. I think a good price to pay for Telstra stock is around $4.00 per share. In the current low interest rate environment I doubt it'll get to my buy price but that's fine by me because I know there are plenty other buying better opportunities currently available on the market (see below).
