When it comes to long term investing, it’s sometimes difficult to decide when to buy shares in companies. That’s because, while a company may appear to have a bright long term future, its share price can fluctuate sharply in the short run, which could mean that a better opportunity presents itself a little further down the road.
Similarly, as is the case with AstraZeneca (LSE: AZN) and Shell (LSE: RDSB) in recent months, share price gains can cause investors to question whether to buy or to wait for a lower price.
However, in the case of AstraZeneca and Shell, both companies could be well-worth buying today. Here’s why.
AstraZeneca
With shares in AstraZeneca having benefitted from multiple bid approaches from Pfizer earlier this year, they have made gains of 14% year-to-date. This significantly outperforms the FTSE 100, which is down 1% over the same period, with AstraZeneca now trading at a premium to the wider index. Indeed, its price to earnings (P/E) ratio is 15.6 versus 13.3 for the FTSE 100.
Despite this premium valuation, AstraZeneca offers huge potential. The key reason for this is an improving drugs pipeline that has the scope to increase AstraZeneca’s bottom line over the medium to long term. For instance, AstraZeneca has made a number of key acquisitions over the last 18 months, notably Bristol-Myers Squibb’s share of the two companies’ diabetes alliance, that could transform AstraZeneca’s sales numbers over the next five years.
Furthermore, the acquisitions could make an impact a lot sooner than that. While earnings are forecast to fall both this year and next, the acquisitions are reducing the size of the potential fall so that AstraZeneca’s shorter term profitability could be much better than the market currently realises. As a result of this potential, AstraZeneca could still prove to be a great long term investment – even if shares are priced higher than they were earlier in the year.
Shell
As with AstraZeneca, Shell has posted strong gains this year, with the oil major being up 9% year-to-date. However, there could be much more to come in future, as Shell’s new strategy of asset disposals seems to be making the company leaner, more focused and, ultimately, more profitable. It also means that Shell’s asset base has a much more lucrative risk/reward ratio, which is great news for the bottom line (and for investors) moving forward.
In addition, Shell continues to generate extremely strong cash flow, much of which is used to ensure investors in the company enjoy a top-notch income. For instance, Shell currently yields a highly attractive 4.5% and dividends per share look set to grow at a stable and brisk pace, with them expected to be 3.2% higher next year. So, while Shell’s share price is higher now than earlier in the year, its new strategy and income potential mean that it could have a very bright future ahead of it.