This trick is something I took from my old trading strategy, swing trading. A fundamental aspect of swing trading is finding undervalued stocks that have recently experienced significant price movements due to shifts in sentiment related to a press release, earnings report etc. After the news is released, a wave of selling begins and the price per share decreases. You watch and wait until it begins to reach a territory where it is undervalued in relation to its fundamental. At that point, you watch for institutional traders to begin buying and initiate a position yourself. The buying pressure begins to increase as others follow along. This drives the price per share back to, or close to, the pre swing levels.
Market Movers Lists
A crucial element of swing trading strategy was finding the stocks that were about to swing at the right time. There was one list in particular that I would check on a daily to find potential investing opportunities before the passed. The “Top Losers and Gainers List” or “Market Movers” lists would give me a quick snapshot of the stocks that had made the largest movements during that day’s trading session. I would then proceed to add them to my watchlist, quickly research the stocks and keep an eye on them for the next few days to see if it was worth getting involved.
For example, the image below was taken from the homepage of Google Finance on 4.2.2014. On that day, there were 3 large cap dividend stocks that had made significant price movements. This is a great place to start when getting acquainted with market conditions and finding trending stocks.
Here’s another example. The image below is from my eTrade account on 4.2.2014. As you can see, it only takes a few seconds to quickly check and establish a point from which to begin your research.
How Does This Play Into Dividend Stocks?
So, how does this play into dividend investing? Well, those same lists can be used to find dividend stocks that have recently experienced significant price movements and present an undervalued entry point (loser) or a sign of significant future growth (gainer). Sure, in the long run a 1-2% difference may not seem like much, especially when our primary focus is the compounding power of dividends. However, finding a good entry point can easily account for your transaction costs and allow you to buy an extra share or two. Or, if it’s a gainer, can let you get in early before the stock really takes off. Why leave money on the table if you don’t have to?
If you do plan on implementing this strategy, make sure you have previously researched the stock, understand the fundamentals and analyzed whether or not the recent price movement has fundamentally changed forward outlook. Don’t ignore long term growth potential just because a once sound company dropped a few points and presents an attractive entry point. For all you know, that drop wasn’t due to sentiment but an industry changing factor that limits earnings growth moving forward. Make sure it meets all the rules before you place the order!
Full Disclosure at Time of Writing (4.2.2014): Long KO