Di­ag­nos­ing a stock’s health If a stock in your port­fo­lio seems to be stag­nat­ing, there are many fac­tors that could be con­tribut­ing. It’s im­por­tant to as­sess what is hap­pen­ing be­fore dis­miss­ing the stock.

Finweek English Edition - - MARKETPLACE - Ed­i­to­rial@fin­week.co.za

sowhat hap­pens when you have a sick stock in your long-term port­fo­lio? When I say sick, I don’t mean a stock that is crash­ing – that sce­nario may prove fa­tal, un­less it is as a re­sult of an over­all mar­ket crash, in which case the mar­ket is sick, not your stock. What I am re­fer­ring to is a stock that is stag­nat­ing; it’s been drift­ing in your port­fo­lio for at least two or three years, pay­ing div­i­dends but not moving higher.

Firstly, as al­ways, don’t panic. This hap­pens and may not be a worst-case prog­no­sis – it could just be the flu. Over the last cou­ple of years, the mar­ket as a whole has done lit­tle and many stocks have fol­lowed suit.

The re­al­ity is that stocks go up, they go down and some­times they go side­ways, which can go on for ages. With a stock that is ex­pe­ri­enc­ing a side­ways range, one should not worry; three years is a blip on the radar when com­pared to a life­time of in­vest­ing that will span decades.

How­ever, it is still im­por­tant to check if you’ve erred in your se­lec­tion, and con­sider whether you should exit the stock.

The first thing to do is as­sess how its peers on the JSE have been per­form­ing. Are they soar­ing, crash­ing or also go­ing side­ways? If they’re also stag­nat­ing, this could in­di­cate a sickly sec­tor, and it would be wise to in­ves­ti­gate the sec­tor as a whole. The sec­tor could be in de­cline (like our lo­cal steel industry) in which case an exit may be the best route.

Or per­haps it got well ahead of it­self and the side­ways move is just the share price wait­ing for earn­ings (and val­u­a­tions) to catch up. The lat­ter has oc­curred in the re­tail space over the last cou­ple of years to a de­gree, and many of the stocks are still off their highs. In this case the val­u­a­tions had gone crazy, so they needed a rest.

But if it seems to be solely your stock that is suf­fer­ing, you need to start dig­ging deeper. Find the ini­tial notes you made when you bought the stock for the first time. Were your as­sump­tions and ex­pec­ta­tions re­al­is­tic? Have things changed? Did you ex­pect some­thing to hap­pen, which hasn’t come to fruition? If it hasn’t, why not? Were you wrong or too early? Ba­si­cally, go and re­visit all your the­o­ries about the stock that at­tracted you to it and en­sure that you were right and that they still ap­ply.

Things also change with stocks and that ele­ment that made a stock great may no longer be present.

So check it against its peers. What’s hap­pen­ing to the mar­gins of the com­pe­ti­tion ver­sus the mar­gins on the stock you hold? Are they un­der pres­sure? Is it the en­tire sec­tor or only your stock? Is your stock los­ing mar­ket share? (Check like-for-like ex-in­fla­tion growth, for ex­am­ple.) I find industry pub­li­ca­tions and web­sites can some­times be use­ful for do­ing some dig­ging on th­ese sorts of is­sues. Of course be care­ful as industry or­gan­i­sa­tions may only be shar­ing the good news.

Check to see if any merger or ac­qui­si­tion ac­tiv­ity oc­curred, which may have moved the mar­ket­place in favour of, or against, a par­tic­u­lar stock. A com­peti­tor con­duct­ing a sig­nif­i­cant merger or ac­qui­si­tion may have had a neg­a­tive im­pact on the stock you’re hold­ing. Al­ter­na­tively, per­haps your stock con­ducted a deal, for which it over­paid, or the syn­er­gies weren’t as great as man­age­ment promised.

Es­sen­tially, you need to go back to the be­gin­ning and start afresh. Re­view ev­ery­thing about the stock and if at the end of the process you’re still happy to hold it, then hold. Don’t worry about a few years of lack­lus­tre per­for­mance. If you’re not happy, then exit and find a new awe­some stock to own.

With a stock that is ex­pe­ri­enc­ing a side­ways range, one should not worry; three years is a blip on the radar when com­pared to a life­time of in­vest­ing.

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