The coronavirus stock market crash has been very pronounced the world over. Here in the UK, the FTSE 100 index fell almost 25% in the first quarter of 2020. Even despite having the second best April performance in a decade, the index slid again at the end of last week, taking it back below 6,000 points.
This goes to show that volatility is high and that there’s not a linear trend in the market. Steep falls are met by sharp bounces, and vice versa. While we’re not short-term traders, it’s important to try to pick an opportune entry point when buying a stock. Holding out for the first three months of the year would have enabled you to buy at a 25% discount. Below is my checklist when looking to buy.
Check the P/E ratio
The price-to-earnings ratio is a very common metric used by investors. It basically shows how much (as a multiple) you’re willing to spend to buy the share in relation to the profitability of the business. For example, if the price is 10p and last year the business made 1p per share profit, the P/E ratio is 10. Obviously you would like to buy the share at the lowest P/E ratio possible.
Mathematically, this can be done if the share price is low. If the share price fell to 7.5p, the P/E ratio now becomes 7.5. Given the coronavirus stock market crash, the P/E ratio for some firms has dropped significantly. This can represent a good-but-undervalued long-term stock to buy.
Check the dividend yield
This is a tougher one to tick off the list, given the many FTSE 100 firms cutting dividends at the moment. The dividend yield measures the percentage return paid via a dividend, relative to the price you paid for the stock. For most, the last dividend was paid before the virus made an impact, so check for the most up to date news.
You can still find good yields (above 5%) from firms that have come out and committed to paying dividends this year. I outlined some examples in an earlier article (including Legal & General and BP), which you can read here.
Check the Q1 trading statement
Most businesses have already released their financial statements for the first quarter of this year. These are a valuable insight into the early impact that the virus has had on their revenues. These statements also give an indication of the future impact on the business this year. You may see profit revisions lower, or a note acknowledging anticipated hits to performance. HSBC is a good case in point here.
Before buying a stock after the coronavirus stock market crash, read the report and make sure you’re comfortable with the projections given by the firm for the rest of 2020.
Overall, having a checklist enables you to avoid buying stocks on a whim. It can also help to prevent unnecessary losses that could have been avoided by doing some simple research. And it gives you a higher chance of being profitable in the longer term.
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Jonathan Smith has now shares in any firm mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.