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September has historically been an underperforming month in the stock market. No two years are the same, but the long-term cumulative trend for September has been disappointing to say the least. No one knows yet whether or not we'll see a market crash this fall, but we will eventually. That could be a generational buying opportunity, and I certainly don't want to miss it! So I'm now polishing my list of stocks to buy in the next crash.
Here's why.
stock market returns are all about valuation
A common mistake some investors make is to obsess over how great a company's business is.
Maybe you have a unique product or a captive market. Maybe you look like you'll benefit from high customer demand over the long term, or you have a clever business model, such as selling an expensive piece of equipment and then also selling replacement parts for that product (the legendary Gillette razor and blade model taught in business courses around the world).
But that doesn't necessarily mean it's a good investment.
In the long run, what you gain (or lose) as an investor depends on two things besides taxes: the difference in price between what you pay for a stock and the price you end up selling it for, and the dividends you receive along the way. Smart investors also weigh the opportunity cost of tying up their capital while owning that stock.
A stock I would love to own
As an example, consider Intuitive Surgery (NASDAQ:ISRG).
Its business model is almost textbook: it makes robotic machines that can perform surgical operations, helping hospitals cut costs and potentially improve surgical procedures. It's a potentially huge market, with limited competition and big budgets.
By selling peripherals (since every surgery requires new, sterilized equipment), Intuitive’s installed user base generates recurring revenue streams.
Net profit margins are high (26% last year) and the market appears to have great growth potential. The more that is sold, the better Intuitive's library of training materials will become, making its offering even more attractive to hospitals.
The main risk I see is that ai development could lead competitors to accelerate their development timelines, leading to much more competition and lower profit margins. Still, I would be happy to have Intuitive in my portfolio.
Waiting for purchasing opportunities
Still, I don't.
Because?
Simple: valuation. Many other investors like Intuitive for similar reasons to me. They have driven up the share price by 178% in five years, meaning it now trades at a price-to-earnings ratio of 80. That's too high for my taste.
So what do I do when I discover a stock I like, at a price I don't like?
I don't just forget it, I add it to my life. list of stocks to buy if I can do it at a price that I consider attractive.
I'll be reviewing that list in September. Like everyone else, I have no idea when the stock market will suddenly take another dip. But when it does, since such corrections sometimes have a limited duration, I want to be ready to act immediately, with a list of stocks to buy in hand!
