Owning a company when its value is plunging is rough. It’s easy to start doing the ‘I should have sold it at x’ or ‘What does everyone know that I don’t?’ or ‘I just have to wait for it to make back its value, then I’ll sell’. We’ve all done it. But would you sell – locking in your losses – if you knew your stock was going to fall substantially further? Or if you thought the business would recover, would you sell out once its share price improved – or would you continue to hold it for the long…
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Owning a company when its value is plunging is rough. It’s easy to start doing the ‘I should have sold it at x’ or ‘What does everyone know that I don’t?’ or ‘I just have to wait for it to make back its value, then I’ll sell‘.
We’ve all done it.
But would you sell – locking in your losses – if you knew your stock was going to fall substantially further? Or if you thought the business would recover, would you sell out once its share price improved – or would you continue to hold it for the long term?
Here’s my take on what could be done with three of this week’s biggest losers:
BHP Billiton Limited (ASX: BHP) – last traded at $19.67, down 34% for the year
BHP’s decline has been well covered in the media, with the likelihood of a reduced dividend, weak commodity prices, and the incident at Samarco all weighing on the share price. Shares are now at the lowest price they’ve been since 2006, down 0.73% in the past 10 years.
The short-term outlook for the company depends on a couple of things, such as the iron ore price (recently hit a new low of US$43), the Australian dollar, the costs of Samarco, and whether the company will take on debt to maintain its dividend.
In the near term, with iron ore still falling and the costs of Samarco yet to be felt, I suspect its share price could head further down. However, with a solid asset base, experienced management and a reasonable balance sheet, I would ‘hold’ BHP.
Slater & Gordon Limited (ASX: SGH) – last traded at $1.935, down 66% for the year
Slater & Gordon shareholders have had a tough year. There was blood in the water after last week’s Annual General Meeting, and short-sellers again punished the stock. Up to 16% of Slater & Gordon’s float is held for short-sell, a marked increase on earlier this year.
The company’s performance hasn’t alleviated investor worries, with a slower-than-expected start in the UK and a massive cash outflow forecast for the first half of this year. Management stated the company is on track to meet its guidance, but many are sceptical and with so much uncertainty and rampant short-selling I do not believe shareholders are being compensated for the risks of owning this stock.
I believe Slater & Gordon shares could fall further, and I would consider selling the stock today.
Dick Smith Holdings Ltd (ASX: DSH) – last traded at $0.665, down 70% for the year
Dick Smith shareholders have also had a terrible year – hopefully there aren’t too many who also hold Slater & Gordon! After a shock earnings downgrade a month ago, shares fell to 92 cents, before declining even further to their current level of $0.66 per share.
At this price, Dick Smith Holdings trades on a Price to Earnings (P/E) ratio of just 4, which frankly looks very cheap, even if further earnings and dividend downgrades are factored into the price.
Investors have been made very wary of the stock, and I expect that Dick Smith’s share price could rise meaningfully from here – assuming there are no other gremlins waiting to see the light of day. However, buying shares right now is only for investors with a high risk tolerance.
What would YOU do if the market crashed tomorrow?
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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.