In golf, there's something called a mulligan. If you hit a bad tee shot, sometimes a playing partner might say, "Don't worry about it, hit another one." A minute later, with your second ball in the middle of the fairway, it's easy to forget about your first ball that might be sitting at the bottom of a pond.
Unfortunately, there are no mulligans when it comes to investing. Your decisions have consequences -- for better or worse. As someone who bought shares of Snap (SNAP 0.69%) in April, I'd love a mulligan, but I'm not going to get one. Instead, I have to take a step back, consider my options, and move forward.
First reason to buy: Dollar-cost averaging
One of my favorite articles on Fool.com is What is Dollar-Cost Averaging? by Lou Whiteman. In it, Lou breaks down the concept of dollar-cost averaging, explains its pros and cons, and illustrates why it works.
Dollar-cost averaging fixes one of the biggest problems we humans have when it comes to investing: emotion. We're emotional creatures; we evolved, in large part, with the help of our emotions. And while an emotion such as fear surely helped us dodge the occasional rattlesnake or hungry lion, it doesn't make us better investors. In fact, it tends to lead us astray when it comes to investing.
Dollar-cost averaging means investing regular sums of money into a given stock over a set period of time. Say you have $5,000 to invest. With dollar-cost averaging, you might invest $1,000 on the first Monday of each month for five months in a row. It's simple, and it takes the emotion out of the decision of when to invest.
I've used this strategy with Snap -- buying in April, May, and June. By doing this, my cost basis is in the low $20s, even though my initial purchase price in April was $38.52. If you plan on holding for the long term, as I do, dollar-cost averaging is a great way to see the recent decline in the stock price as an opportunity -- not a reason to panic.
Second reason to buy: Upcoming earnings combined with low expectations
Snap last reported earnings on April 21. The company missed first-quarter expectations for earnings, revenue, and average revenue per user, while it beat expectations for daily active users. After moving lower following the earnings miss, Snap shares sold off another 30% in May, when the company pre-announced that it would not meet its second-quarter guidance.
None of this seems particularly bullish for Snap. However, there is a silver lining here: Expectations for Snap's second-quarter results are low. Over the last 90 days, Wall Street analysts have slashed their full-year earnings-per-share (EPS) estimates for Snap.
SNAP EPS Estimates for Current Fiscal Year data by YCharts
Snap is due to report second-quarter earnings on July 21. If the company meets or beats its already lowered expectations, it could catch a bounce. What's more, it's possible that management recognized what wasn't working and has already developed plans to address the problem. In recent weeks, Snap has unveiled a new subscription plan, Snapchat+. It will cost $3.99 per month and allows subscribers to unlock certain features within the Snapchat app. It won't fix Snap's reliance on advertising, but it's a start.
Reason to hesitate: Economic headwinds
While I'm still a long-term believer in Snap, I must admit that current economic conditions will challenge the company in the short term. Inflation is high; businesses are cutting costs. Ad budgets are likely to shrink as the year goes on. And while Snap has enough cash flow to weather the storm, I'm not sure it can thrive until inflation cools off and the economy regains its footing. In the meantime, I'll continue accumulating shares and lowering my cost basis.
