Should I Buy Expensive Stocks Now That They’re Cheaper?

“Quality stocks are typically super expensive, so I usually don’t buy them because I don’t have that kind of money. But maybe I should think like you, and now that they’re cheaper I should go ahead and buy!”, a young woman suggested while we were talking about investing.

I’ve asked followers on Instagram for some input to new blog posts and that has led to some excellent conversations. And it was interesting to hear how my message about buying quality at a low price can be perceived. 

Photo by Karolina Grabowska

I was glad we had had that conversation because the stock price will not tell you whether a company is quality or not. The stocks that come with a high buy price are not necessarily quality companies, but I can see how people might think that. Because in the “real world” – the world outside the stock market, the quality and price often (not always) are connected. A high-quality leather wallet is often more expensive than a low-quality artificial leather wallet. It’s not always like that - but sometimes. My favorite sock brand is Falke and the socks are more durable than other socks I’ve bought – they do also come at a higher price point (I buy socks on sale though – surprise surprise). 

Price is what you pay. Value is what you get.

Warren Buffett

Back to the point! I can understand where she is coming from. Because when I say: buy quality - some people think that high quality equals a high stock price. But when I talk about quality companies, I mean that the business is healthy: there’s a profit (not a loss), no or low long-term debt, sales growth, ROIC and ROE greater than 10%, that management has talent and integrity and that the company has a moat.

Let’s take Equinix Inc for example. If you look at analysts’ recommendation the company is a “buy”. The average price for Equinix is $761, which is 13% higher than the current price of 674. The price per share is in the higher range but the question is: is Equinix a healthy business just because the stock price is high? Let’s take a look. 

The ROE is 5% and ROIC 2% has been in that low range for years, we want 10% so I don’t even need to continue considering this business. It’s not necessarily a terrible business but there’s one parameter that would make me not buy, so I don’t have to continue to look at this company. Please note that this is not my buy or sell recommendation of Equinix – the business is not in my circle of competence, and I don’t know it well – it’s just an example of following a strategy with concrete parameters. It’s easier to make a decision when there are these set parameters for a healthy company. 

Warren Buffett has mentioned that he likes an ROE above 10% and because he has done extraordinarily well over decades, I want to model what he is doing.

Regardless of the stock price, make sure to use your investing checklist to ensure the business is wonderful