What a December so far, especially if you own both Bellamy's Australia Ltd (ASX: BAL) and Sirtex Medical Limited (ASX: SRX), as I do – pass me a glass of red please.
Whilst the S&P/ASX 200 is up eight tenths of one percent so far in December, Bellamy's and Sirtex are down 45% and 42% respectively. That's just in the last seven trading days.
In the case of Bellamy's, the main reason for the fall was the announcement on 2 December 2016 that the company is experiencing a 'temporary dislocation due to regulatory changeover' in the Chinese market for infant formula. Additionally, the market wasn't informed of the severity of the situation at the company's AGM back in October.
It's also not a good look to see that CEO Laura McBain and Chair Rob Wooley had been selling shares well north of $14 back in August.
The market wasn't amused.
With Sirtex, there's increased competition in the Interventional Oncology (IO) market for the company's SIR-Spheres microspheres leading to dramatically lower forecast growth for the 2016-17 financial year.
The risks for Sirtex stock have risen in my opinion and it remains to be seen what the Overall Survival (OS) data from the SIRTEX/FOXFIRE/FOXFIRE Global studies will look like when this is released before June of next year.
Sirtex disclosed too that a majority of clinicians are adopting a wait-and-see approach on the results before jumping all-in with SIR-Spheres microspheres.
Hence the massive reduction in sales growth.
Where to from here?
I was going to include charts of both stocks' share price so far in December, but then I thought, well, most of you out there can easily imagine what a vertical line looks like.
So, what's next, especially if you own one or both of these stocks?
One answer may be that it's going to depend on how your portfolio is already structured.
If both Bellamy's and Sirtex combined were a significant proportion of your portfolio, you're going to be in a world of pain.
For example, if you have a $25,000 portfolio with equal weights in four stocks, two of which are Sirtex and Bellamy's, then assuming the other half of the portfolio is unchanged, you'll now be down 21.75%, or $5,437.50.
On the other hand, if Bellamy's and Sirtex were both, say, under 10% of your overall portfolio combined, then your financial wounds aren't going to be as acute. Your decision to sell or hold your shares from this point on won't have the same consequences for your overall net worth when compared to more concentrated portfolios.
In my case, prior to this crash in each of these stocks, our portfolio weighting to Bellamy's and Sirtex respectively was 4.53% and 4.12% (perhaps still a little high in hindsight).
Those figures now are approximately 2.50% and 2.40%, with an associated decline in the long term portfolio per annum performance of only 1.5% or so.
If there's one good thing to come out of this share price crash, our portfolio weightings of both stocks have automatically fallen to reflect the increase in business risk (yep, that's looking on the bright side).
A long time ago, I learnt first-hand of the relevance of diversification after being caught short with way too much National Australia Bank Ltd. (ASX: NAB) and Harvey Norman Holdings Limited (ASX: HVN) in the portfolio.
But since then, I've held a decent number of positions, diversified by industry, market cap and currency, and I've managed to mitigate much of the risk, even after being blindsided by bad news.
How does your portfolio look?
Does your overall portfolio contain enough stocks to limit the damage to a small percentage fall, or have these two offenders wiped you out?
If you're in the latter camp, I sincerely hope you don't give up on investing. I'd also like you to read (or re-read) the 6 golden rules for successful sharemarket investing to keep you focused on what's really important.
Foolish takeaway
If you're new to investing, I encourage you to not only keep saving and investing, but to strive to build a portfolio of at least 15-20 positions. This will give your portfolio a balance that will provide some protection from any one or two stocks bombing on crummy news.
Whatever you do though, don't leave all your precious hard-earned eggs in just a handful of baskets.
By doing so, you're simply taking on unacceptable risks which, with a sensible portfolio approach, just isn't needed to do well.
