You are not logged in.

#1 31-08-2020 07:32:22

Admin & Trader
From: Paris - France
Registered: 21-12-2009
Posts: 2910

Is it time to buy European shares?

Is it time to buy European shares?

This year has been good so far for the stock market. In most developed markets, it has recovered in record time from its 1st Quarter lows.

The U.S. stock market is outperforming its peers. This is no coincidence, as studies show that the older the stock market is, the higher its returns.

At this point, an investor may be tempted to look at certain ratios and decide where their money might be better invested for the next 15 or 25 years. Such a ratio is the one that exists between U.S. stocks and European stocks. It has recently reached its lowest level in a century, a stunning difference.

Some valuation parameters to consider for major U.S. companies

Let's take a look at Apple. It's one of the most innovative companies in the world, and their genius has changed the way companies operate. It reached a market capitalization of $2 trillion last week, and its performance for the year is currently at over 59%. In terms of the past five years, the annual growth rate is over 34%.

However, if we look at revenue growth, it is only at 5.9% this year, and 3.8% if we use the compounded annual growth rate for the last five years. Yet the company has reached its second trillionth market capitalisation in record time. More precisely, in less than a year since it reached the first.

While the technology sector should not be called a bubble, investing in a company with growth rates like Apple's should be taken with a grain of salt. At some point, perhaps not now, traders will want better revenue growth than this. Otherwise, how else can an investor justify the fact that shares are trading at more than 35 times the price-to-earnings ratio?

People involved in finance have a saying that the market can remain irrational more than a trader can remain solvent. Indeed, if you look at the performance of Tesla or Apple, the shorts have been burned without mercy.

For those who are not aware of the risks associated with short-selling stocks, just consider that the losses are unlimited. However, when you buy shares, you can only lose the amount invested. That's why brokers will quickly come to you and ask for more margin, because the stock price keeps increasing if you run out of shares. In case of strong market fluctuations, there is no time to add additional funds to the trading account, and the broker triggers the margin call. This is how short sales occur, with the broker buying back the shares from the short seller.

Selling short in the stock market has never been easy. But investors have an alternative: look for companies with better valuation parameters.

"Anything worth having is worth going for - all the way." - J.R. Ewing



Board footer