A common mistake many investors make is focusing on just a company’s quality or just its stock price. It’s important to consider both when making investing decisions. You’ll want to be able to answer the following questions affirmatively:2. Is the company’s stock priced attractively right now?
Alternatively, you might buy into an exciting, well-managed, fast-growing company when its shares are grossly overvalued and more likely to fall than rise in the near future. Buying when a stock seems undervalued offers you a margin of safety. When a stock is overvalued, it can mean that much of its growth potential over the next few years is already factored into its price.
Determining whether a stock is attractively valued can be difficult, and the views of savvy stock analysts can differ sharply on any given stock. Comparing a stock’s recent and forward-looking price-to-earnings ratios to their five-year averages can give you a rough idea. If there are no positive earnings, you might look at the price-to-sales ratio.