“The shares are down – they’re cheap!”

If I’ve heard it once I’ve heard it a thousand times. For a car or house it may be a fair comment, if not perfect. Unless you’ve crashed the car you can still drive it. Unless the house has collapsed you can still live in it. That said, “cheaper” doesn’t always mean “cheap”.

It’s a relative thing. Something can be “cheaper” today because the price has fallen. But that doesn’t mean it is now “cheap” compared to similar things. The drop may be justified if things have changed. It might still be expensive in relative terms.

Shares are no different; assets you can buy and sell, but only worth what someone else will pay. That price is based on all market information (good and bad). It also depends how desperate buyers and sellers are to buy and sell.

If you (and the market) expects a company to make more profits, or pay more dividends, the share price will probably rise. If everyone expects less profits, or less dividends, the shares will probably fall.

Prices rise when sellers demand – and buyers are willing to pay – a premium. This usually happens because good news boosts the company’s prospects. Buyers pay the premium because they are optimistic the shares will rise for a profit.

Prices fall when sellers have to offer – and buyers demand – a discount. This tends to be the result of bad news denting opinion about the company’s prospects. Sellers offer the discount because they want rid of. Buyers demand the discount because of the extra risk.

Unless of course you believe the share price drop is overdone. Which is your prerogative. It’s what keeps prices rising and falling and the stock markets turning. There’s nothing wrong with considering something “cheap”, if you can back it up.

Fundamentally you might see the company’s share price offering better value than peers. Technically you might see a clear level of support that could prevent the shares falling further and engineer a bounce.

Just don’t assume a lower price today means shares are now officially “cheap”. Cheaper, yes, but not necessarily cheap. Prices rise and fall based on appetite for the shares, dictated by news and information, which changes daily.

Next time something looks “cheap”, check why the shares are lower . It may be for good reason. Profits warning? Problems? Broker downgrades? Furthermore, never forget that something “cheap” today can easily become even “cheaper” tomorrow, and the day after….

For daily alerts about fallers at support levels and strong candidates for a rebound get access to our research Gold Pass.

This week INTU properties and Galliford Try bounced 7% after 13% declines, Next is up 6.5% after a 5% fall. KAZ Minerals is 3.4% higher after trading off support, while JD Wetherspoon and St James’s Place are +2.5% and +2.8%, respectively.

Quality ideas highlighted to our clients this week. Hand-picked trade opportunities communicated alongside a generous selection of daily ranges, breakouts, momentum, results and dividends.

If you like the sound of these, make sure you’re in pole position to act next week. Sign up now!

Mike van Dulken, Head of Research, 22 Feb 2019