I came across a recent article about Square (NYSE:SQ) that said SQ stock gained 23% in August. If you’ve owned the fintech for a lengthy period, you’re probably familiar with this sort of monthly gain.
The recent correction of tech stocks has Square’s share price down 9.6% in September through the first six days of trading. If you’re intent on owning its stock for a lengthy period, you probably would like it to fall some more.
So far, in 2020, that hasn’t been the pattern. If the remainder of the year follows the path it’s taken through the first eight months of the year; investors ought to expect more gains before the year’s out.
As a result, buying on the dip becomes even more critical for accumulating a position. Here’s why.
12 Months of Returns for SQ Stock
To get an idea of what types of monthly returns Square generates, and why buying on the dip is critical to your long-term success when it comes to SQ stock, I’ve gone back 12 months to give you an idea.
Square’s Monthly Performance – Past 12 Months
|Period||Return (%)||Period||Return (%)|
|September 2020||-9.6%||March 2020||-37.1%|
|August 2020||22.9%||February 2020||11.6%|
|July 2020||23.7%||January 2020||19.4%|
|June 2020||29.4%||December 2019||-9.5%|
|May 2020||24.5%||November 2019||12.5%|
|April 2020||24.4%||October 2019||-0.8%|
So, including the losses month-to-date in September, Square’s stock has eight positive monthly calendar gains out of the past 12. The average of those gains is 21.1%. The average of the four negative months is 14.3%. If you take out the best and worst from each, you get 9.6% for the negative months and 21.2% for the positive ones.
That’s right. It went up by 1/100th of a percent by taking out the performance of the top and bottom months.
Let’s assume that you bought 100 shares at the end of each month’s closing price. No, that’s not how the real world works. I’m just trying to make a point.
Theoretical Purchases – 12 Months
|Month||Price Paid||Total||Month||Price Paid||Total|
|September 2020||$144.21||$14,421||March 2020||$52.38||$5,238|
|August 2020||$159.56||$15,956||February 2020||$83.33||$8,333|
|July 2020||$129.85||$12,985||January 2020||$74.69||$7,469|
|June 2020||$104.94||$10,494||December 2019||$62.56||$6,256|
|May 2020||$81.08||$8,108||November 2019||$69.12||$6,912|
|April 2020||$65.14||$65.14||October 2019||$61.43||$6,143|
Using a dollar-cost averaging methodology, you would buy $108,469 of Square stock at an average price of $90.39 a share. Based on the Sep. 9 closing price of $144.21, your return on investment over the past year is 59.5%.
If you invested the entire amount on Oct. 1, 2019, your return over the past year would be 132.8% or more than double.
So, what would happen if you only bought 100 shares in the four months in which Square’s stock fell on the month? You would have invested $32,058 in Square at an average price of $80.15 for a return of 79.9%.
Lastly, if you had invested the $108,469 on a dollar-cost averaging basis, and then an additional $32,058 on the four occasions, the stock fell on the month, your return on investment would be 64.2% based on a total investment of $140,527 and an average price of $87.83.
That’s only marginally better than buying at the beginning of the year and letting it ride.
So What Does This Mean for SQ Stock?
For one thing, it suggests that the old saying, “The best time to invest is when you have the money,” is true when you’re talking about long-term holds such as Square.
More importantly, I do think it points out the importance of having a system and sticking to it. For example, if you believe Square is only worth $120 and it’s currently trading at $144.21, you don’t buy it until it is trading at $120. No exceptions.
That takes patience. Buying on the dip also takes patience. Square has had four negative months in a year. At some point, I’ll go back over the past five years on a monthly basis to see what the long-term trend looks like.
Seeing as it has an annualized total return of 75.8% over the past three years, I’m guessing the pattern is relatively similar.
The Bottom Line
At the end of July, I wondered if Square stock, which had delivered a 280% return from the mid-March lows, had any gas left in the tank. I didn’t think it was too late if you were buying Square for the long haul.
“If you buy today at $129, where it’s trading as I write this, and you hold for three to five years, I don’t think there’s any question you’ll get a reasonable return on your investment,” I wrote on July 31.
It’s up 12% in the six weeks since, despite the September correction. If it falls some more before the month is out, I’d buy some more. You never know when you’ll get another chance.
Long-term, Square remains on my list of strong buys.