The Chicks' 12 Steps to Picking a Stock

STEP 12  Buy On Sale

Note: This article focuses on Step 12 of the Chicks' Dozen. For articles focusing on other Steps, see the links listed at the bottom of the page.

Woo Hoo, Honey! You’ve made it to the twelfth principle of the dozen! If you’re just joining us, you may be thinking, Buy on Sale? These Chicks are a bunch of chirping market timers! Let me assure you, nothing could be further from the truth, although this criterion does make me chuckle. What Chick worth her salt doesn’t love a sale? How could we not include it in the Dozen? In principle # 4, we want a company to be a leader in its field; in # 6, we want gross margins to be above 50%. This principle is different. Its sole purpose is to simply arm us with more information. We’ve been known to call it the "tie-breaker" when all else seems to be pretty equal.

The best illustration I can offer you is at the supermarket. When I’m strolling through the toothpaste aisle at my local Albertson’s grocery store, if I see either Crest or Colgate on "Bonus Buy", I’ll pick the Bonus Buy every time! However, walk with me down to the soft drinks and I don’t care if they’re giving Pepsi away, I’m still buying my twelve pack of Classic Coke! Get my point? If there isn’t any difference in a product other than price, get the cheaper one. If there is a difference in quality, paying the premium is worth it.

Now, obviously, in the stock market there are no clearly marked Bonus Buys. This market doesn’t offer any kind of club card that gets you extra savings. Untwist your feathers, ‘cuz once again we will arm you with a simple formula that will at least give you a benchmark figure to compare where your stock is trading relative to the past year. Any site that offers you stock quotes should also list that stock’s 52 week high and low. You simply add together the 52 week high and 52 week low and then divide by two. This will give you the 52-week average.

Now compare this number to the stock’s current trading price. If it falls below the 52-week average, we Chicks say there is definitely a "blue light special" going on. Speaking of which, why don’t we check out where good ol' Kmart is trading these days, just to make sure we haven’t left any stray Chicks behind.
KMART (NYSE: KM)
52 week high = 13.31
52 week low = 5.75
52 week average = (13.31 + 5.75) / 2 = 9.53
Current trading price = 5.9375

Yep, Kmart’s stock has definitely been marked down.

Remember Chickie, this is most important: just because a stock is on "sale" does not mean it’s a good company to invest in! There are many reasons a stock can be off its high, some warranted, some unwarranted. A fallen stock price may mean the company has suffered a major misstep, such as fraud, or maybe their product can no longer compete with the competition. These are stocks we want no part of at any price.

On the other hand, maybe the whole market took a dip because of rising interest rates or the company suffered a minor blunder and the market overreacted. These are opportunities that we Chicks can take advantage of. I know I don’t need to tell you how to shop; you know when something is worth paying full price and you know when you’ve found a deal. Now, hang on to that intuition, armed with your Chicks Dozen, and go forth to the most super market of all... the stock market.