After you’ve made the decision to buy a stock, even the most long-term investors will have to re-evaluate it from time to time. Rather than fret over every bit of news — Is yesterday’s 5% rise just the beginning of a spectacular rally, or is it about to tank? — it’s better to set aside time to look over your portfolio on a regular basis and give it a checkup if you will.
Every six months or so, go over each stock you own, and review whether you should keep it or not. Compare your portfolio return with a market index like the S&P ASX 100 Index (ASX: XTO) and remember to add in any dividends you received during the time — that’s part of your return, too.
When buying a stock, it’s a good idea to keep a journal to record those initial thoughts, and then you’ll have something to refer to as you ask yourself if the company story is the same, better or worse now. In famous investment manager Peter Lynch’s book Beating the Street, he wrote there are two basic questions you want to answer:
1. Is the stock still attractively priced relative to earnings?
2. What is happening to make the earnings go up?
As an example, Echo Entertainment (ASX: EGP) was at $3.46 a share in mid-April when about that time it was announced that Crown (ASX: CWN) was invited to go to stage 2 approval level for the possible development of a new hotel in Sydney that would allow high roller VIP gambling.
Echo Entertainment has the only casino in Sydney, but when the idea of another gambling venue in Sydney moved closer to reality, the share price sank, bottoming out at around $2.60. It’s now down to a price-earnings (PE) ratio of 19, but how have its earnings prospects changed if it will have to compete when its exclusive casino rights expires, and the proposed six-star venue is opened at Barangaroo?
Its casinos in QLD are also under threat of more competition, so it will have to spend more in capital expenditure to build new sites and remodel others to keep them competitive if others enter the region. More expenses means less net profit, so earnings can be expected to flatten or shrink over the next five years unless revenues can correspondingly increase.
As we can see in Las Vegas and Macau, more than one casino can operate in a city profitably, but when you move from having exclusive rights to having to contend with the company of one of Australia’s richest men, James Packer, investors have to revisit their reasons for owning the stock.
Is the story better or worse, or has another wrinkle appeared that may change the original story? Keeping a long-range view on your portfolio may mean pruning back some positions, and there is no reason why you can’t buy the stock again if the share price is attractive compared to the new earnings story.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.