Category: Fundamental analysis

2019 Calendar Review and, at last … some quality

Slack Investor’s in-depth reviews of performance are done at the end of the Australian financial year (30 June) – but a brief look at how things went in calendar year 2019 is in order. It has been a great year for the share investor. Roger Montgomery reports that the Australian All Ordinaries Accumulation Index delivered a return of 24.0% in calendar 2019 – more than double long-term average annual total return. Other World Index yearly changes for 2019 (without dividends) are listed below.

Indicies% Change
Australian All Ordinaries19.10%
S&P 50028.90%
Nasdaq35.20%
Nikkei 22518.20%
FTSE 10012.10%

Quality Street

Slack Investor puts a bit of time into initial stock selection. Before entry to the Slack portfolio, I comb the company universe for high Return on Equity stocks that have low debt and a proven track record of increasing dividends. Delighted to report that a couple of Australian ETF’s have recently emerged that do a similar thing, using parallel principles to the great Benjamin Graham in selecting quality stocks – automatically!

BetaShares Global Quality Leaders ETF – QLTY

QLTY provides access to the 150 highest quality global companies (ex-Australia) based on a combined ranking of four key factors – return on equity, debt-to-capital, cash flow generation ability and earnings stability.

VanEck Vectors MSCI World ex Australia Quality ETF – QUAL

QUAL has a similar objective screening process, to fill its stock register. Companies must have a high return on equity, stable annual earnings growth, and low financial leverage. 

There are common elements to the top 10 holdings for each ETF. Companies like Apple, Visa, Facebook and Alphabet feature on both registers. Either of these ETF’s would be a great addition to a portfolio but Slack Investor would lean towards BetaShares QLTY because of their slightly less expensive management costs (0.35% vs 0.40%). Past results indicate there is outperformance attached to this “quality” approach.

Cumulative “Quality” index performance vs world Benchmark – net returns (30 November 1994 to 30 April 2015) – From Van Eck Whitepaper

My only criticism is that both ETF’s have quality filters that do not seem take into account how expensive the stock is. When Slack Investor researches stocks, I usually dismiss a company if the forecast earnings (+2 years) produce a PE that is over 40. With QUAL and QLTY, it is quality first, regardless of price. I am mollified slightly by the determination that, in the past,

MSCI World Quality Index traditionally has its strongest relative performance during economic downturns

From Van Eck Whitepaper

Sometimes people ask me what stocks to buy – and I seldom have a good answer for them – particularly if they are just starting out on the path of buying shares and their portfolio carries the risk of just one or two stocks. These two ETF’s have given Slack Investor an easy answer.

  • Instant Diversification – International exposure
  • Access to high growth companies with a good track record of increased earnings
  • Rules based stock selection – no ‘active manager’ fees -this should keep expenses low ~ 0.4% … but could be lower!

The early results are not bad either with Morningstar listing one-year performance for 2019 for QUAL and QLTY at 35.8% and 34.5%, respectively.

These sort of products might just put Slack Investor out of a job!

What’s that smell? … Banks!

With great thanks and acknowledgement to the insightful and talented Randy Glasbergen

KPMG have just reported that banks are starting to lose their shine and the big 4 banks in Australia have reached a “turning point”. Slack Investor would argue that, after a pretty good recovery post the GFC, Australian Banks have been in decline since early 2015. NAB is the last to confess this reporting season … They are all businesses that will find growth difficult.

With its full-year profit of $4.8 billion, down 13.6 per cent, it joined ANZ, Commonwealth and Westpac in announcing a big decline in earnings.

From abc news
The ASX Bank Index since 2000. Except for the GFC 2008/9, the banks have performed well – as well as paying high dividends. Things changed in March 2015 where, despite temporary recoveries, there has been a general decline in share price. From Investing.com

Self Managed Super Funds are a great place to park your super money for the hands-on investor. But, they are not for everyone. You really need to have a real interest in investing and at least $200 000 in your super savings. According to ATO Data, at 31 December 2017, the most commonly held SMSF share investments (by investment size) are below: There are a lot of banks!

Commonwealth Bank
Westpac Banking Corporation
National Australia Bank
Magellan Global Fund
BHP Billiton Limited
Platinum International Fund
ANZ Limited
Telstra Corporation
CSL
Wesfarmers

Not a bad portfolio for the past 10 years … but, the tide for the banks has already turned with low interest rates affecting margins, increased competition from the more nimble digital banks, the Hayne Royal commission “blowback” forcing the banks to separate from their profitable wealth management businesses, and recent dividend cuts announced. A closer look at the top 5 SMSF shares with financial statistics from the excellent marketscreener.com. The 1-yr returns over the past year for each stock are lifted from marketindex.com.au .

SMSF 2017 Top 5 Shares P/E 2020Yield %ROE %1-yr Ret %
Commonwealth BankCBA155.51312.4
Westpac BankWBC145.911-3.7
National BankNAB1261216.7
BHP BillitonBHP125.32210.9
ANZ ANZ12612-3.9
Average 135.7146.5

Slack Investor can understand the lure of juicy bank dividends for SMSF funds. But, if the dividend is coming with a reducing share price due to the bank business shrinking – then this is not a good deal – and perhaps look to higher yield industrial shares or industrial/office REITs for that cherished income rather than banks.

Sing the praises for Return on Equity (ROE) and Earnings per Share (EPS) Growth

This is one of the first financial statistics that I look at when deciding on a company to buy. Return on Equity is a company’s Net Profit ÷ Average Shareholder Equity. If a company had a net worth of $10 million and made a profit of $2 million, its ROE would be 2/10 x 100 = 20%.

High ROE companies generate a lot of cash – this cash they can then use to grow their business. If they also have a good increase in their Earnings Per Share (EPS) – Slack Investor would classify them as “Growth” Companies.

CSL Earnings per Share- and projected EPS for 2022 -2024

Generally, companies with a ROE of >15% get Slack Investor’s attention but some businesses require lot of infrastructure before they can generate profit. For this reason ROE is best used to compare companies in the same industry. For contrast with the 2017 SMSF, let’s have a look at Slack Investor’s Top 5 stocks from the Portfolio page (This is not advice!). Data gathered from marketscreener.com and marketindex.com.au .

Slack Investor Top 5 Shares P/E 2020Yield %ROE %1-yr Ret %
CSL LtdCSL381.23538.3
Altium LtdALU461.63144.9
Cochlear LtdCOH411.73826
Macquarie Group LtdMQG164.41611.5
REA Group LtdREA401.33527.9
Average 362.03129.7

The average ROE for the Slack Portfolio is much higher than for the 2017 SMSF top 5 (31% vs 14%) . They also all have a projected increasing Earnings per Share (EPS) – and this indicates the Slack preference for growth companies.

However, with growth comes volatility and the Slack Investor top 5 would not suit those who rely on their investments for income. The Slack portfolio would probably suit an investor with a longer term view and a separate income. If you are still working and want to grow your wealth through shares … then the ROE should be one of your guiding lights for company selection.

Portfolio Trim and Fitcats

From House Beautiful – May be subject to copyright

On the theme of a trim … who doesn’t like a bit of topiary. My portfolio has had a little haircut in the past 3 months as I have been thinking about the potential of a recession and the effect it might have on my investments. Lacking the skills of Nostradamus, Slack Investor has chosen the “middle path” for his individual stocks i.e . Between doing nothing and “selling everything”, I have chosen to fiddle with about 20% of the portfolio. Some of the things I have bought are expanded on below, in order of investment commitment. This is not advice, just a random walk through stock selection. To make room for the new purchases I sold a few high PE stocks and a few underperformers. The sold stocks include APX, CGC, PMC, AGL and CTD.

Alphabet -Google ( GOOGL)

This is new ground for Slack Investor as GOOGL is US based company and the investment has the additional complexity that I have to use an international broker (Saxo) to purchase shares on the NASDAQ exchange. But, I feel the extra effort is worth it as I can’t think of a better company to ride with through the next 10 years.

Google search has 92% global market share. Chrome is the world’s most widely used web browser. Android is the world’s most popular mobile operating system with 2 billion-plus active users. YouTube is watched for more than 1 billion hours a day. Alphabet has about US$100 billion in cash which, for a sense of scope, is larger than the combined market values of Telstra, Woolworths, and Macquarie.

Joe Magyer from Motley Fool on the dominance of Google’s Alphabet

I use Google products countless times a day and with a Return on Equity of 21 % and a reasonable Price Earnings ratio (for the growth tech sector!) of 24. I would like to own more of this and will seek to add to my position over time. The international shares thing is a bit of a hassle and has some extra expenses. A far easier, way to get a slice of Google (and other great tech growth companies) is by buying the Australian-listed NASDAQ ETF (NDQ). Alphabet represents 8.6% of the NASDAQ Index.

Vanguard Australian Fixed Interest ETF (VAF)

For ETF’s, I naturally lean towards Vanguard due to their relatively low fees and a commitment to keep them low (Thanks Jack Bogle!) I bought this ETF to try and derisk my shares portfolio by getting some exposure to the Australian Government Bond and Fixed Interest Market. I have also bought some Vanguard Emerging Markets ETF (VGE) and Vanguard Global Infrastructure (VBLD).

Centuria Industrial REIT (CIP)

The lure of property rentals during tough times and a bit of exposure to Industrial Real Estate has brought me to this area. I was tossing up buying Goodman (GMG) or Centuria. Both have a similar Weighted Average Lease Expiry (WALE) and occupancy rate. GMG has a relatively high 2020 PE of 26.1 compared with a CIP 2020 PE of 14.8. CIP also has a more fruity yield of 5.7%. Case Closed.

United Overseas Australia (UOS)

A Malaysian real estate developer … Steady on, this sounds a bit wacky! – UOS is a bit of a speculator for Slack Investor. Real estate is a place where I am underdone and I am alway convinced by good arguments. A respected investor (by me), Tony Hansen, from EGP Capital has this stock as his highest portfolio allocation. UOS has a solid cash position, a decent yield and the discount to net worth got me over the line. What is life without a little bit of risk!

Fitcats – Get your super runnin’

With apologies to the legendary Steppenwolf, Slack Investor has the news from Chris Brycki (the tireless CEO of Stockspot and author of the Fatcat/Fitcat report). He has produced his yearly assessment of the best super funds (Fit Cats) and the worst (Fat Cats). Fat Cat Super Funds on average charge 2% a year in fees, while, in comparison Fit Cat Super Funds charge less than 1% a year in fees. 

“One of our golden rules of superannuation is; the less you pay, the more you get. Always pay less than 1% p.a. in fees so your super isn’t eroded by high fees. I know 1% doesn’t sound like a lot, but for the Aussies stuck in these Fat Cat Funds they’ll be worse off by $200,000 or more compared to their friends who are in a low-fee fund,” 

Chris Brycki, Stockspot

So, if you haven’t already done so … get financially fit, grab yourself an account number in one of these top performers. Most will allow new customers. Then continue to get some Fit Cat action by asking your employer to make any future contributions to your new account. Then rollover your super to the new fund and your sweet.

Terrible Things

Yes, … there are some images that stick in Slack Investor’s head … and this is one of them! The average ceramic toilet should last 50 years. The relentless view from a toilet’s perspective must be pretty confronting – and the cumulative exposure must be horrific! Apart from now treating each toilet that I encounter with great respect … and giving acknowledgement for past suffering – this image has made me think of the terrible things I’ve seen.


Residents of Idalia, Townsville survey the damage. Picture: Michael Chambers – Courier Mail

Firstly, a shout out to those in Townsville (Where Slack Investor has a house). A massive flood event has occurred on the Ross River and affected many homes. The mud, the silt, the mould, the smell, and the destruction as water has invaded homes is horrific … and definitely qualifies as a terrible thing. As one who has had flood water in his home, fortunately not in the main living areas, my thoughts are with those badly affected as the town moves toward recovery.

Terrible things of a far lesser order

We are now in the “confession season” where Australian companies must report to the market. Slack Investor is predominantly invested in “growth” companies – and there is inevitably always some bad news with some of these stocks where the companies sales do not meet expectations – for whatever reason. As news breaks there is usually a rapid sell-off and the price drops dramatically.

Daily chart for Costa Group (CGC) – From incrediblecharts.com
Daily chart for Challenger (CGF) – From incrediblecharts.com

Now the nature of Slack Investors slackness is that he doesn’t get involved in the daily ructions of a stock price – but he is confronted with these sorry charts at the end of each week (and month) when he does his portfolio reviews – He must decide what to do next! A good start is to read the press for any information on why these stocks have fallen – Is it a panic sell … or is there something fundamentally wrong with the prospects for this company at this time.

The top chart is of Costa Group (CGC), a food producer with interests in mushrooms, blueberries, raspberries, tomatoes and avocados. A profit downgrade led to the big price drop, but consensus seems to be that the sell-off was overdone due to the seasonal nature of fresh food supply. The long term prospects for sustainable growth in Australia and internationally look good and Slack Investor is a remainer in CGC. More useful advice to millenials (But this actually makes sense!)– as well as eating the odd “smashed avacodo“, aspire to owning a company that produces them!

I originally liked the story behind Challenger (CGF), an annuity provider that should be able to tap into the retiring “baby boomer ” market. There are a few articles on Challenger that discuss the recent 8% profit downgrade that led to this slump – blame is apportioned to the Hayne Enquiry, recent poor investment returns and politics. CGF was one of my defensive big picture stocks (on a good dividend 4.7%) that I was sure would come right – but the downward trend on the chart would suggest that I have hung on for too long. The stock price might bounce back – but it seems that there are enough headwinds to inhibit growth in the near term. I will be looking for a chance to rotate out of CGF and into another company such as Treasury Wine Estates (TWE) over the next few weeks. TWE had some cash flow problems this reporting season, but is projected to grow sales and revenue with a good return on equity in the next few years (14.1% in 2020).

  • Treasury Wine Estates (TWE) – Projected sales growth to 2021 – from marketscreener.com

After a relationship breakup – When is the right time to start dating again?

Coco Chanel
Coco Chanel in 1920 ( ) – From bestlifeonline.com

Lets just get this out there … Slack Investor knows just the bare minimum on human relationships and isn’t qualified to give advice on matters of the heart. The only piece of useful knowledge that I can pass on is from, designer and business woman, Coco Chanel.

“As long as you know most men are like children, you know everything.” — Coco Chanel (1883-1971) from source

It has been a torrid last couple of months in the share market and Slack Investor has had to say goodbye to some of his old friends (Stocks that I have had a relationship with!) Last post I briefly looked at when its time to break up with individual stocks – this is something Slack Investor always finds a hard thing to do as I have to overcome the “confirmation bias”  that tells me that I did the right thing in picking them in the first place – and, taking a loss sometimes is never pleasant. However, I steel myself with the conviction that it is the overall result that counts and to do that, you must associate with some winners

Let’s have a look at the overall Australian market. The economy is running along fine and the All Ordinaries is close to its long-term average value PE Ratio of 15 (15.6 Australian Financial Review 16/11/18). The US  pundits are starting to talk about a possible recession in couple of years time – but this is now – and Slack Investor still whiffs (but does not know!) that the current downturn is an ordinary correction in the charts due to a change in sentiment. In the UK, things look a bit of a Brexit mess – so expect more bad news there.

I start with a watchlist of 15-20 companies that I like – or have been recommended in the press or internet. I then go to the most excellent site marketscreener.com where you can access a variety of analyst data on world stocks by free registration – entering your stock symbol and then going to the financials tab. The thing I love about this site is the predictive data for the next couple of years. These figures are just forecasts as they are based upon the companies sales predictions for itself … but a good company won’t try to “gild the lily” too much on its predictions of earnings.

For each company, I write down their future PE’s, yield and Return on Equity (ROE). ROE is really important and should be 15 or more. A company must have increasing sales, an increasing history of dividends and manageable debt. I setup a group of companies that have reasonable numbers and put them in a table  (… like below!)

Company Symbol Future PE Future Yield % Future ROE Sales Inc Divdnd Inc Debt Chart Momtm
2019/2020 2019/2020 2019/2020 EPS History Chge(Wk)
Costa Group CGC 23/20 2.4/2.7 18/19 YES YES OK YES
Macquarie Group MQG 14/14 4.7/4.9 17/17 YES YES OK YES
Service Stream SSM 13/11 5.1/5.7 23/24 YES YES OK YES
Amcor AMC 15/12 5.0/5.3 67/71 YES YES OK YES
Reece REH 20/19 2.2/2.3 15/14 YES YES OK YES

That is the” fundamental” part of my analysis … and then I wait patiently, watching the weekly charts until there is a change in momentum on a stock – this is the “technical” part of the analysis. I will try to buy the company as soon as I can after this momentum change … but set a stop loss just In case I am wrong!

There are many chart indicators that show a change in momentum. I like using the 11-week Directional Movement Index (ADX) on a weekly chart – or a breakthrough of a downward trend line. Examples of changes in momentum are shown below on the weekly charts of Amcor (AMC) and Costa Group (CGC)

AMC Weekly chart – Incredible charts

CGC Weekly chart – Incredible charts

This is not advice … But I have recently bought these companies and will report back in a year as to how things have worked out.

I have also admired the US Technology Index (NASDAQ) from afar for a long time – but never had a chance to buy it. It is available  in Australia as a Beta Shares ETF (NDQ). However, NDQ is still moving south and has yet to break out of its downward trend.

Technically speaking, maybe it nearly is time to start dating again!

Chance would be a fine thing

Image result for chance would be a fine thing shakespeare
Still from the Peep Show – Image may be subject to copyright – found at this link

One of the great things about England is the turn of phrase that the locals enjoy. “Chance would be a fine thing” is a good example of language that is perplexing to the new arrivals. It is the sort of saying that sometimes crops up in the UK that has a meaning that is not entirely obvious.

In context, someone in England would utter this phrase in response to a comment from another that sets up a desirable scenario – but the retort “Chance would be a fine thing” is said to indicate that it is not likely to happen! Further context can be found in the great tribute by David Mitchell to insecure managers in the short but very fine Peep Show “Chance” sketch at this link. Youtube Autoplay will reward the brave with another great character from the show  -“Alan Johnson”,  the crude and aggressive management guru in the following Youtube clip – But Language Warning with Alan – I Digress! (… but still giggling!)

I like the “chance” phrase, it reminds me of the enormous part that luck plays in the building of a share portfolio – but it is the very opposite of how I think when I buy a stock! I do not buy stocks often and a buy is usually at the end of some good research where I have convinced myself that the stock is growing and is just about to take off when the rest of the market catches up to my brilliant thinking. Bitter experience and keeping good records over 25 years has shown my abilities in picking winners at around the 55 -60 % mark.

At first glance this looks a pretty poor record of stock judgement – However, by keeping my losses relatively small (through monthly stop losses), owning a diverse range of companies (see Portfolio Page), and letting my rising shares rise, and luck, the Slack Investor has done alright – Five year compounded average growth rate (CAGR) for my audited SMSF portfolio of 16.9% p.a..

The luck of stock selection has always been acknowledged by Slack Investor, but it was brought home to me when my son asked, in December 2017, for advice on where to put $5000 in the share market. You would think that this would be an easy thing for Slack Investor who has spent almost 30 years studying the vagaries of the market. 15 months ago I went into a lather and researched very hard and came up with two growth stocks that I thought were not overpriced and had reasonable growth prospects – but I still had a bit of trepidation as, he is my son, and this was his hard earned savings from a part time job -and,  I wanted him to continue with the allusion that his Dad knew what he was talking about!

With the usual combination of research and luck, the two stocks that I presented him with were stocks that I already owned – Fisher and Paykel Healthcare (FPH) and Altium (ALU). I gave him the choice after a brief overview of each company (… spread the risk … give him ownership!). The former are world leaders in surgical instrumentation and pumps. and Altium has something to do with printed circuit board design and the “internet of things”. With the wisdom of youth, he picked Altium to put his savings into. I am relieved to say that both stocks have done extremely well in the past 15 months but the weekly charts tell a story – with my son’s choice, ALU, the clear winner (+177%).

Fisher and Paykel Healthcare (FPH) Weekly Chart – From Incredible Charts

 

Altium (ALU) Weekly Chart – From Incredible Charts

Do you think Slack Investor could come up with another Altium as a choice for share investment the next time my son asks me for advice?

Chance would be a fine thing!

January 2018 – End of Month Update … and Milk 2018 style

Slack Investor remains IN for US, UK, and Australian index shares.

… some monthly setbacks for the Australian Index (-0.5%) and the UK index (-2.0%).  However, confidence remains high in the USA with another huge (I mean … It’s like … Really Huge!) rise of 5.6% – This is “irrational exuberance” territory!

Thanks Alexas_Fotos Pixabay

Slack Investor gets off the couch and is on alert for the US Market. The two strong rises over the last two months have pushed the S&P 500 up to breach the the 20-25% upper limit from his previous stop loss. This involves some necessary action – finding a new stop loss that is a little closer to the current price.

From Incredible Charts

The old S&P 500 upper limit of 2786 was surpassed by the end of month price (2823). I then go back to the charts and find a new, higher stop loss that makes sense to me. This is usually a new “higher low” – and I had to look at the weekly charts to find a sensible stop loss minimum at 2557. If this chart stuff interests you, go back to an earlier post. Otherwise, be happy that Slack Investor has moved his stop loss upward and is ready for the inevitable fall (Correction) in the US markets.

A2 Milk Company (A2M)

Slack Investor was blissfully unaware that there are two types of proteins in Milk – Conveniently labelled A1 and A2 – Who knew?? I am blissfully unaware about most things.

A2M is a New Zealand company listed on the Australian Stock Exchange and they own the patent for identifying cows that only produce the A2 protein in their milk. The selling point, backed up with a slick marketing campaign “Enjoy Milk Again “, is that there is evidence to suggest milk containing just the A2 protein is easier for some people to digest.

Slack Investor has been an owner of this fantastic company since last year and has taken the opportunity to top up his holding when A2M reached a new high in the middle of the month at around $8.00 – This is not advice.

There are many claims for A2 Milk, including that the lactose intolerant folk find it easier to digest than normal milk. Slack Investor has had a glance at A2M’s supporting  100 independent studies and he is refreshingly skeptical of these claims till a large sample, “double blind”, piece of research emerges. There are also other skeptics.

However, he cannot argue with success of A2M’s new campaign and the converts to A2M’s products that are reflected in recent sales growth. The action on the price charts and projected sales get me off the couch. Particularly with a recent announcement that A2M is expanding into the large US market. Suprisingly (for me!), 70 percent of African Americans and 90 percent of Asian Americans are lactose intolerant.

Always, before I invest, I want a deep look at a company – I use the excellent 4-Traders site and, in particular, the Financials tab – for A2M has revealed the type of growth trend that Slack Investor likes – the black columns are projected sales through to 2020. Projected increasing sales and income are the type of thing that I am looking for.

From 4-traders.com – click image for better resolution

A2M’s  Current Price to Earnings ratio is an “eye watering” very high 48.  This does not compare favourably with the ASX average PE of around 15. A high PE ratio can be a sign of an overpriced stock- but there are exceptions!

The exceptions are made for exceptional companies. A2M is growing its earnings so fast that the forecast PE is much more reasonable in a few years (i.e. A2M estimated PE is a more reasonable 28 in 2019) and A2M is the type of company that is excellent at using its resources to make money – an extremely high Return on Equity (ROE ~50%). These high PE, high growth companies make up a large portion of Slack Investor’s portfolio. They can be a wild ride … as they are often punished (price drops) if they do not meet forecast earnings during reporting season – but I am happy to hang onto this company for now – there might even be some further A2M good news ahead – If not, my monthly stop loss at $6.97, and diversification, will protect me from catastrophe.

All Index pages and charts  have been updated to reflect the monthly changes – (ASX, UK, US).

What’s that smell? Is this Spring? … It’s Dividend Season!

spring-beautiful-woman-764078__180There is that smell in the air … Is it love? Winter is breaking … New growth erupting on the stems… and Ah Yes, It is Dividend Season – the Prince of Seasons! That time of the year when the companies that you have invested in reward you for your efforts and present you with a fraction of the results of their toil.

There is no finer season – it occurs twice a year! Each company has worked hard during the financial year trying to increase sales and profits … they have crunched the numbers and made reports and hopefully held their numbers close to their chests ready for a festive occasion where the managers and shareholders gather. There is a triumphant report to the shareholders and final dividends are calculated from a share of the profits and a date is set where the patient shareholders receive a cash gift into their accounts as a reward for supporting the company through this last financial year. Hopefully there is growth in sales and dividend, and prospects for the coming few years are good …

Well, this is how its supposed to happen … and if you have done a bit of homework and assessed the company and industry … and management … and competitors  … and economic environment … and heaps of other stuff … OR, you may have just been lucky! … Its how it often happens.

Because Slack Investor is not the most fastidious of researchers (He would much prefer others did the hard work for him!). Sometimes his luck doesn’t run and reporting season brings some bad news and there is a drastic price slide as other investors bale out.

Investors seem very sensitive in dividend season and tend to react strongly when there is a perception of bad things in the air. Particularly stocks that have a lot of good news forward-priced into them (high PE). Triggers such as as when analyst expectations are not met … or profit guidance is revised down … or a product disaster … can reduce share prices by 20 -30% in a matter of hours.

Slack Investor is not watching his stocks hour by hour and has suffered from a few of these corrections. But the beauty of his slack approach is that no decisions need be done on the day … absorb the bad news overnight and ask yourself the question

Given this bad news … Would I still buy the stock at its new price?

If the answer is no, sell at the next opportunity. If the answer is yes, keep an eye on the stock for the next few days …  One of two things will happen

  1. The drastic stock price retreat was an over-reaction and value buyers start pouring in and the price returns to its former glory… your slackness has been rewarded.
  2. The bad news filters through to the general community and analyst and brokers change their recommendations to their clients, people continue to sell and the price slides further.

Unfortunately, the second scenario is more common and even though you may think the stock is more of a bargain now … through experience, Slack Investor has known other bad news to follow bad news and it is prudent to sell the stock (perhaps at a loss) – you can’t hold back the tide! If it is a stock that you like … you can always buy it back when sentiment improves.