Eco Investor June 2017
After a Big Share Price Fall
By Victor Bivell
A share price can have a sudden big fall when a company announces some bad news or there is bad news in its industry, in the market, or more widely. In the past when I have thought that the news did not affect the company's value I have often bought in, only to find I have bought in too soon and the share price kept falling. Catching the proverbial falling knife too often is not good enough. To become a better investor, I need to get better at understanding these falls and to get better at timing my buys.
Some examples. Recently I have been caught out several times with the sudden falls of Murray River Organics, Quintis, Gateway Lifestyle, and Bellamy's. At the end of this piece, I'll take a closer look at these trades. Range International also had a similar sudden fall but I didn't buy, which gives a useful counterpoint for comparison.
After a sudden and big fall, the questions I ask are: How low will the share price go? How long will it take to bottom? Will it bounce back? How long will it take to bounce back? How high will it bounce back? Usually I have no firm idea about any of the answers. That's what makes the share market fair - no one knows the future.
What I do know is that until now I have operated too much on instinct. When I have bought, it was because I felt I knew enough about the company to be confident that it will one day bounce back. But the practical results show that that approach needs some improvement. I need to begin asking each question in a more methodical and thorough manner and to have a better idea of the answers before I press the buy button.
Most of the problems start when I get the first two questions wrong - How low will the share price go and how long will it take to bottom? I understand that it can be impossible to exactly pick the bottom, so I never beat myself up when I don't, but I should always aim to get better.
There are four ways a share price can go after a sudden big fall.
1. It can bounce back quickly.
2. It can bounce back slowly by trending upwards.
3. It can drift sideways, sometimes for a long time.
4. It can continue to fall, either fast or slowly.
I am not that interested in investing in the first type of fall, in the hope that there will be an immediate bounce back. I can't know or be certain it will happen so putting money on it is a punt. And my investment style is not short term punting.
This type of fall needs to be distinguished from where there is no news but for whatever reason there is a temporary dip in the share price that brings it into the buy range. There is always the doubt whether some bad news may follow the dip, but that is not usual.
In terms of investing, I am interested in the second type of fall. These are easier to understand and it is a safer bet that a good company will usually or eventually recover.
So the first step is to try and work out what sort of fall it is. That depends on the nature of the news and how the market views it. Is the issue temporary or permanent? Is it something the company can control or manage, like a need for capital or new management? Is it something that simply needs time to sort out or recover from? Is it something the company can't control or will find hard to manage like a new government regulation or policy change, a new competitor, or a market change?
What investors ultimately decide may take days to show itself in the share price and could stretch out to much longer. So unless I think the news is minor and the share price fall is a big over-reaction, I need to wait before buying. In fact I think waiting longer is the answer to most of my buying mistakes.
Waiting can also be useful to see if all the bad news was in the announcement or whether there may be more bad news to come. That happened with Murray River Organics and Bellamy's. For Murray River Organics, the second bad news was 15 days after the first. In Bellamy's case it was nearly a month and a half after the initial bad news.
Waiting would also give me more time to research and better understand the issue and how the company responds to it. If I am still confident the share price will bounce back, waiting longer would give more time to think about the harder questions - How long will it take to bounce back, and how high will it bounce back?
As I am a patient investor, waiting for a recovery is not difficult. But there is another advantage to having an idea of how long the recovery may take above the obvious ones of shortening the wait and seeing the capital put to more efficient use in the meantime.
For me it would be a big step towards the ideal investment skill of being able to pick when a share price is about to turn upwards, is turning upwards, or recently turned upwards into a new rising trend.
I am a long way from that sort of skill. Yet the importance of that art of picking that turning point was first explained to me by an experienced venture capitalist in 1992 when I was a much younger journalist. It will always keep me humble that it has taken me this long to put my mind to it. Despite the experienced investor's advice, it is clear that after all these years of share market investing I am still not as good as I need to be at understanding and working with trends.
But, again, I am not going to beat myself up over it. The inescapable modesty that comes with knowing my limits and my weaknesses is enough. As much as it would be useful, I don't have to pick the start of the upward trend. I can still be successful by getting better at picking the end of the downward trend.
Murray River Organics
I like the Murray River Organics story. I watched the company and bought a small parcel of shares on 12 April at $1.14, the lower end of its then trading range. The company announced some bad news on 5 May and the share price plunged from $1.03 to 56 cents. On the same day on their way down I bought some shares at 74.5 cents. There was more bad news on 22 May and the shares fell to 37.5 cents, where they have remained.
It is a huge fall. Although it is unlikely to be soon, I believe the company will recover. The first fall was mostly over short term issues. And being in agriculture, there is an opportunity for recovery with each season's harvest and prices, plus with the company's growth plans. At the same time as the share price fall the company bought a big area of adjacent farmland and I thought this acquisition was positive for the short term and very positive for the long term.
TFS became Quintis on 22 March and on the same day a short seller released a negative report that saw the shares fall from $1.415 to $1.295 and to $1.055 the next day. I thought Quintis was still good value and bought a small parcel of shares on 23 March at $1.17. There was a trading halt on 27 March and on 28 March the managing director and significant shareholder resigned to work on a possible private equity buyout. There was more bad news on 10 May, and that day I bought some more shares at 60 cents. I bought some more on 11 May at 40 cents. There was a trading halt on 15 May with the shares at 29.5 cents.
Quintis said it is working on an earnings and trading update. It also said it has received correspondence about potential debt and equity transactions from more than one party and is in discussions with each about formulating a transaction. It expects to recommence trading on or around 7 June.
The price it trades at will mostly depend on whether a takeover transaction has been agreed and at what price. If there is no deal, then the price will hinge on the earnings update.
I was confident in Quintis' value and remain so for the long term. I also thought that the potential private equity deal must have some substance to draw the managing director's interest and could unlock value. Quintis' reinstatement on the market will be very interesting and could be as a big winner or a big loser.
On 30 August last year the company released its annual results, which, although sound, disappointed the market and the shares fell from $2.61 to $2.24. I thought the business was still good and bought a small parcel of shares on the same day at $2.37. I bought another small parcel on 13 January at $2.13. But the shares continued to trend down to a low of $1.855 on 27 February, the same day the company announced its half year results. Since then the shares have trended upwards. They have yet to return to their pre annual results level, but I am confident they have the capacity to do so. A good full year result could be a near term agent for improvement. The company pays dividends which makes the wait easier.
Bellamy's announced some bad news on 2 December 2016 and the share price plunged from $12.13 to $6.80. I waited three days and on 5 December bought at $6.50. There was a trading halt on 12 December. There was more bad news when the shares recommenced trading on 11 January and they fell to $3.73. They then traded sideways for two and half months. In hindsight that would have been the best time to buy. I still believe the shares will recover to above my buy price, so I can wait. I don't know when they will recover, but there could be an opportunity next year when it sorts its manufacturing and Chinese supply issues.
I liked Range's story about recycling waste plastics into pallets and its commercialization plan seemed sound. But it was borderline pre-revenue to pre-profit and I have lost my times on such early stage companies so I was very cautious about buying in. I was nearly tempted when the price was around $1.15 and I put in a low ball order, from memory, at about $1.05. I soon canceled the order when I realized my immediate cash position was low and I had a big bill to pay. I was lucky. Soon after, on 27 April the company came out with bad news about slow sales and the shares fell from $1.10 to 55.5 cents. They have since drifted down to a low of 38.5 cents.
I didn't know that Range would announce sales issues, but my caution about early stage pre-profit companies served me well and I was saved a big loss. This is also an example of where waiting after the big fall has saved me further capital. I still like the Range story, and I could now buy in at nearly a third of the cost. But the outlook is not as good, and I still don't have a lot of capital for early stage companies. So I will wait to see what happens. If I am really lucky, I might even pick the uptrend. (ASX: MRG, QIN, GTY, BAL, RAN)
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