As one of the first companies to produce and gain approval for a COVID-19 vaccine, Moderna (NASDAQ:MRNA) has garnered enormous interest from investors over the past year and a half.
After opening at just over $100 in January 2020, the company’s stock rose to nearly $500 by the third quarter. Although the price has slumped off considerably since then, many investors are still wondering whether they should buy Moderna stock.
Here are three questions you should answer before investing in Moderna to be sure it’s the right fit for your financial goals.
What Is Moderna’s Investment Potential?
The most important element in buying any stock is evaluating its potential as an investment. While there’s no doubt that Moderna (MRNA) has experienced massive popularity with investors recently, that doesn’t necessarily mean it’s a good buy. In fact, the significant MRNA share price retreat since Q3 2020 suggests that the stock ran much too high on sheer momentum and investor sentiment.
Rather than relying on market sentiment, it’s better to apply basic fundamental analysis to determine whether the stock is a good buy.
Fundamental analysis relies on financial metrics to determine the overall strength of a company, its value and its potential for future growth.
The most important aspect of fundamental analysis is determining value. Identifying undervalued companies is a proven model for long-term investment success. This approach, known as value investing, is the strategy that has allowed Warren Buffett to build his extraordinary investment portfolio.
You should also consider a stock’s potential as it relates to your own financial goals. If you were primarily looking for income from your investments, for instance, stocks with significant room to grow but which paid no dividends might not fit your needs. Even the best stocks need to be calibrated to an individual investor’s goals in order to have a place in his or her portfolio.
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Because it’s a relatively young company that has achieved almost unprecedented success due to its COVID-19 vaccine, Moderna is quite difficult to gauge as a long-term investment. Rising earnings, soaring sales and three quarters of profitability all play into bullish sentiment on the stock.
Professional analysts, however, are currently rating Moderna lower than an average of other medical companies. Of sixteen ratings, only seven list the stock as a buy. Target prices run the gamut from $86 to $395. The average target price stands at $238.60.
While booster shots could cause Moderna to surprise the market, the current consensus suggests the stock is overvalued.
Where Does Moderna Fit in Your Portfolio?
When investing in individual stocks, it’s essential to have an overall strategy and know how each stock fits into it. Investors can choose from a variety of strategies, depending on their goals, age and other factors.
You might choose to invest in stocks that will grow rapidly, produce income or which are currently undervalued. For many investors, some combination of these approaches is the right choice.
Moderna, for example, is most suitable in a growth investing strategy. The company does not pay a dividend, making it a poor choice for an income strategy. The likely overvaluation of the stock also rules it out as a candidate in a value investing portfolio.
The company’s mRNA vaccine platform, however, could allow it to develop new vaccines against diseases other than COVID-19 going forward. This, combined with ongoing distribution of COVID-19 primary shots and boosters, could drive future growth.
As shown by analyst price targets, however, the short-term growth potential appears limited. As a result, Moderna’s best use is likely as a long-term hold in a growth strategy portfolio.
As you consider Moderna’s place in your portfolio, it’s also important to keep diversification in mind. Keeping your capital spread across several different investments helps to reduce risk. If you already own several biomedical stocks, for instance, adding Moderna could concentrate too much of your portfolio in that area and increase your risk level.
If you haven’t planned out a diversification strategy yet, consider investing in low-cost index funds to rapidly diversify your portfolio.
How Much Should You Invest in Moderna?
If you decide to buy Moderna stock, you’ll have to decide how much money to put into it. While it may seem like a decent growth opportunity, you should still follow general diversification rules to avoid outsized risks in your portfolio.
A good rule of thumb is to invest no more than 5 percent of your portfolio’s total value in any individual stock. For example, a $250,000 portfolio should include a maximum of $12,500 worth of Moderna.
Given that Moderna doesn’t pay a dividend and isn’t a well-established blue chip company, its role within a portfolio will likely be to generate high levels of growth.
Depending on your exact goal, you might choose to include more or fewer shares of high-growth stocks like Moderna as you build your investments. If your primary goal is rapid growth and you’re fairly risk tolerant, you might choose to buy the safe maximum of 5 percent. If you’re looking for a growth option to hedge a portfolio more geared toward security or income, though, a smaller percentage could make better sense for you.
You should also make sure to have some basic financial guards in place before buying Moderna or any other stock. Ideally, you should have a 3-6 month emergency fund saved before you begin investing. This fund will make it easier to navigate losses of income without forcing you to liquidate your investments.
Once you answer these three questions, you’ll be able to decide whether or not to buy Moderna stock. Above all else, be sure not to get swept away on the general sentiment that surrounds Moderna. Just because the stock has skyrocketed due to the pandemic doesn’t necessarily make it a good long-term investment.
Take a cool and rational approach to your stock purchases, and you’ll be much more likely to succeed in creating a portfolio that meets your financial goals.
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