Dramatic falls in a stock price … are not very nice. However, they are part of the game when investing in growth stocks. These falls usually come during reporting season. This is sometimes known as ‘confession season’.
ASX-listed companies are all required to report their earnings within two months of June 30 and December 31. The half-year reports are usually floated into the market during August and February – and this is the main time that the confessions come in. ASX companies can also give quarterly updates and, they are strictly bound by ‘Continuous Disclosure’. This is where they are obliged to promptly announce any new information that may affect the stock price.
Once an entity becomes aware of any information concerning it, that a reasonable person would expect to have a material effect on the price, or value of the entity’s securities, the entity must immediately tell ASX that information – ASX Continuous Disclosure Guide
When bad news comes in, there will be an announcement and there is usually a fall in stock price. Most of the time, bad news comes in the form of an earnings forecast not being met – an earnings downgrade. It is time for Slack Investor to get off the couch.
Slack Investor is not a ‘Day Trader’ and, also Slack! This means that I get wind of a dramatic fall in one of my holdings at the end of the day. Sometimes it is even days after the event.
This gives me time to think about what to do next, and there are two schools of thought.
- Accept the loss and sell the stock to employ your funds elsewhere – as bad news often comes as a series.
- Reassess the numbers on the company and ask yourself ‘Would you invest in this company today at the current price?‘
Experience tells me that I am usually better off with option 1 – and investing the proceeds with a, hopefully, price increasing stock.
Recent Case Studies from the Slack Investor Rogue File
Megaport (MP1)
This was a sudden fall from grace as I had just bought this in August 2024. There was an earnings downgrade and it was an easy decision to get out as I hadn’t developed any ‘love’ for the company. I was wrong on my understanding of this companies earnings growth.
Webjet (WEB,WJL)
This is a complex one. Slack Investor recently bought Webjet (WEB) at around $9 on the basis of their fast growing internet business WebBeds – and its seemingly good projected numbers. In September 2024, Webjet went through a demerger that split the business into its retail Travel Agent (Webjet Group – WJL.ASX) and its global Business to Business booking site, mostly WebBeds, (WEB Travel Group – WEB.ASX). Webjet announced a profit warning on 14th October and the share price plummeted 35% in a day. Whoops!
I planned to sell WJL, the retail travel agent part of the business (not a high growth sector), and keep the growing (+22% CAGR) demerged WebBeds (WEB). This might be a good business one day – but the big 35% drop spooked me I sold them both for a combined price of $4.80. Ouch!
Codan (CDA)
5-YR Chart CODAN – From Yahoo Finance
Slack Investor thinks this is a good growing business but they had some revenue shortfalls that caused a 19% 1-day price drop in 2022. I probably should have got out then. However, I have grimly stuck with them and, after 2 years of falling stock prices, they seem to be on the right track. It remains in my portfolio.
Dicker Data (DDR)
After a 16% fall in a day in May 2024, I reassessed the numbers on this stock – a projected 2026 PE of 16 and an ROE of 39%. The numbers looked pretty good – and I held on. However, the last two years of revenue growth have been 2% and 4% respectively. I am not sure what is going on … but this company has not been growing. I sold at $8.69 this week.
Taking a loss … and moving on
This is a real skill – that doesn’t come easily – but is essential for managing a portfolio of growth stocks. I am better at this than I used to be. Usually, growth stocks will come with a high Price/Earnings ratio as the future earnings growth will be factored into the price of the stock. These type of companies are particularly susceptible to a rapid decline in price when bad news emerges that might affect future earnings.
“Some people automatically sell the ‘winners‘— stocks that go up— and hold on to their ‘losers‘— stocks that go down— which is about as sensible as pulling out the flowers and watering the weeds” – Peter Lynch – One Up On Wall Street
Slack Investor tries to adhere to the Peter Lynch philosophy when tending to his garden of stocks. I won’t always get these decisions right – but I now find it ‘cleansing’ to get rid of my bad performers. With experience, I have found that, more often than not, if there is a dramatic 1-2 day fall in a stock price (>15%) – it often takes a while to recover! Slack Investor is usually happy to take the loss and move his funds elsewhere.
Despite these bad performers, I don’t beat myself up about them. It is just part of investing. I take solace that my whole portfolio is up about 8% in the 4 months of this financial year – and I have good long-term results.
With the money raised from selling my dud investments, I bought into quality earnings with half the proceeds topping up my Supply Network (SNL) holding. The rest went into a new stock that I have been watching for a while – the logistics software business WiseTech (WTC).
The company had a price drop over a saucy scandal involving the founder and CEO Richard White. He resigned and Slack Investor is betting that these private-life dalliances should not interrupt the fine profitability (ROE 2026 20%) and established revenue growth (1-yr 2024 CAGR 20%) of this great Australian company.
October 2024 – End of Month Update
Slack Investor is IN for Australian index shares, the US Index S&P 500 and the FTSE 100.
All markets drifted down slightly. As many of the big market crashes have occurred in September and October, I am always relieved to get past this time of year.
For October, the ASX 200 (-1.3%), the FTSE 100 (-1.5%) and the S&P 500 (-1.0%).
All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).