Avoiding big losses within your portfolio is arguably even more important than owning big winners. Whilst the last 12 months have generated a return of just 0.95% for the S&P/ASX 200 (INDEX: ^AXJO) (ASX: XJO), investors in specific stocks such as Arrium Ltd (ASX: ARI), Atlas Iron Limited (ASX: AGO), Southern Cross Media Group Ltd (ASX: SXL), Mermaid Marine Australia Limited (ASX: MRM) and ALS Ltd (ASX: ALQ) have experienced share price declines of 74.9%, 63.6%, 55.1%, 49.3% and 45.5% respectively.
Individually these are nasty losses and highlight the importance of running a well-diversified portfolio.
Whilst all investors (on the long side) will of course be doing their best to avoid owning stocks that experience these types of major declines. Once a stock has experienced a significant drop such as these have, they can sometimes represent appealing buying opportunities.
Buy, Hold, or Sell?
Consider the five stocks mentioned above…
Arrium and Atlas are both exposed to iron ore production which has obviously been affected by the significant decline in the iron ore price. Given their fixed cost structures they offer significant upside to higher prices for the bulk commodity, as such both stocks are positioned for significant gains should the iron ore price rebound.
Shareholders in Southern Cross Media have experienced a painful fall in what many would have expected to be a relatively stable business. The fall in earnings doesn't look to be over just yet based upon management's guidance for the current year, however, it is possible the lower earnings level is now fully reflected in the current share price.
Mermaid Marine has been a popular stock with fund managers recently, partly thanks to a major capital raising to fund the $449 million acquisition of oil and gas service provider Jaya. The acquisition has significantly increased the size and scale of Mermaid's business which could help turn around the group's performance in the future.
ALS, like many of its mining service peers has been forced to downgrade earnings guidance. Based upon the company's latest guidance, ALS is expected to earn underlying profits for the half year ending September 2014 of $64 million. According to consensus, FY 2015 is forecast to be the low point in earnings for the group, suggesting now could be an appealing entry point into the stock.