Timing is crucial in buying stocks

Donald Saltz

July 17, 1992|By Donald Saltz

There is an emotional trait that causes some investors to buy certain stocks at exactly the wrong time -- after long price run-ups. Sharp gains in share prices whet one's buying appetite but in reality, most of the quick price gains are supported by little more than rumors and hopes and not by solid reasons.

A recent example is what happened to the share price of the GEICO Corp., a large insurance company headquartered in Chevy Chase.

GEICO shares, which were split 5 for 1 about two months ago, were trading after the split at near 50, having run up sharply prior to the split and accompanying dividend increase.

After the GEICO shares were split, they languished for weeks.

But then in just a few recent trading sessions, the share price shot up a total of 15 points, to 65.

Even more quickly, it tumbled back to 50.

A stock that gains several points in a day appeals to those who want to take quick advantage of a situation without regard to the long-term attractiveness of the company.

However, some who buy the shares during such a period are long-term investors who are probably making a mistake by paying too much.

They're simply buying at the wrong time.

During the quick rise in GEICO's share price, there was mention that the gain was in response to recommendations by several brokerage firms' research departments.

There was no explanation for the fast decline.

Nothing solid triggered that fast jump and stock prices cannot stay up on plain air.

Neither should stocks be bought without something substantial behind gains such as improved earnings; a beneficial restructuring or acquisition; a possible sale of the company or merger; a buyback of company shares; new management; or exceptionally promising new products.

To ignore this is to place investment money at substantial risk.

One of GEICO's attractions is its principal shareholder, Warren Buffett, whose company, Berkshire Hathaway, owns 48 percent of GEICO.

Buffett has a long history of very successful investing and a price gain in the shares of a company owned nearly half by Buffett will bring in more buyers for the stock.

This is true even though Buffett is not on GEICO's board of directors, nor does he attempt to influence management.

GEICO's first quarter this year produced a 5 percent per-share earnings gain; the second quarter won't be reported until next month.

There was also an increase in the number of policies -- up about 9 percent -- but nothing dramatic.

GEICO's earnings were virtually unchanged from 1989-91.

Shares of the company, primarily an auto insurer operating in 48 states and the District (more than 90 percent of its business), are selling today for about 19 times annual earnings,a healthy price-earnings ratio.

The P-E had risen to a lofty 24 during the run-up to 65.

While the P-E might seem high, it is not sitting there alone.

AVEMCO Corp. of Frederick, largely a general aviation insurer, has a current P-E of 24 and its earnings, too, have been on a rather even plane for years.

AVEMCO is about one-third owned by the GEICO Corp.

Neither GEICO nor AVEMCO are bought for their dividend returns.

AVEMCO yields 1.5 percent, and GEICO, 1.2 percent.

Therefore, neither of these companies has the dividend "floor" to support its price the way a lower P-E, rather high-yielding stock does, especially in these days of very low interest rates.

There is no guarantee that a dividend payout will support a share price, unless that dividend is secure.

For years, the USF&G Corp. was a high dividend payer with the payout reaching nearly $3 a share for a 10 percent yield.

The company, a multi-line insurance company, suffered losses that caused a reduction in its dividend payout to just the current 20 cents a share.

USF&G's share price is gaining steadily and reached a new annual high this week, but it is not a duplicate of the wild upward swing displayed by GEICO shares.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.