“You simply cannot buy something cheaply unless there is some bad news. If there’s no bad news, then it’s already in the price” – Simon Mawhinney
Many investors tend to panic and oversell stocks when hearing negative news either about the companies themselves or external factors affecting them. A short-term bad news induced drop in the share price can, however, offer opportunities for the astute investor. Provided you understand the company and the fundamentals and outlook remain positive, this could be a chance to top up or add to your current holdings at a favourable price, particularly if you intend to hold the shares for the long term.
Share prices fluctuate on a daily basis based on all sorts of news and events – movement in commodity prices, proposed regulatory changes, company scandals, the list goes on. When this happens you should ask yourself whether the share price been pushed down far enough to offer good value and if the company fundamentals are good enough to get it through the event.
Investors also have a tendency to sell stocks on bad news even when the news only affects one segment or product of a diversified company. A single loan product sold by Money3 (ASX:MNY) was subject to an ASIC review which questioned if it met the suitability test imposed under responsible lending obligations. Although Money3 is a licensed credit provider of short-term loans and financial services with a diversified range of products, the share price fell to a low of 87 cents.
Pretty soon Money3 and ASIC came to an arrangement whereby Money3 reduced fees and paid out a modest amount to effected customers. The temporarily depressed share price has now recovered to around $1.40.
Programmed Maintenance (ASX:PRG) is an ASX listed company engaged in the provision of staffing, maintenance and project services. In February 2016 a business update came out with the line: ‘Sharp drop in demand for marine services following a further recent decline in oil and gas prices.’
Although less than a third of the company’s revenue came from this segment, the share price plummeted by about half. Since then the share price has increased from a low of 93 cents to the price today of $3 for an increase of 222%.
If you know the company and how the announcement will affect the fundamentals you can make an informed decision to hold, sell or buy more and not panic and sell.
Integrated Research Limited (ASX:IRI) is an Australian company that provides performance monitoring and diagnostics software. In late January 2017, the company put out an announcement that one of their customers had gone into administration. IRI had multiple other major customers and the announcement even stated they did not expect the loss to have a material impact on NPAT. Nonetheless, the price opened the day’s trading at $2.93 and fell to $2.65 before closing at $2.84. Today it is at $3.29.
Understanding the business you are invested in will help greatly when analyzing company announcements and the impact of external factors on the business. This will help you see the big picture and make a rational and informed decision to buy, sell, or hold.