3 stocks at risk if earnings disappoint

You should be very happy if you’re a shareholder in Domino’s Pizza Enterprises Ltd. (ASX: DMP), St Barbara Ltd (ASX: SBM) or Corporate Travel Management Ltd (ASX: CTD) and have held shares in these companies for at least a few years.

The problem that shareholders face though is that, assuming they wish to continue holding on to their shares, there’s a lot of downside risk in the short-term if each of these companies fail to meet the market’s expectations in the coming weeks.

If you bought your shares in any or all of the above, your returns would have been as tabled below (based on share prices as at 12 August 2016):

Company 1 year (%) 2 years pa (%) 3 years pa (%)
Domino’s Pizza Enterprises Ltd. 89.85 82.47 92.45
St Barbara Ltd 522.00 431.72 77.09
Corporate Travel Management Ltd 56.84 55.52 56.87

Not bad at all.

In dollar terms, this would have meant a tidy capital gain where, if you had invested $10,000 three years ago, your respective investments today would be worth:

Domino’s Pizza Enterprises Ltd. $71,277.71
St Barbara Ltd $55,536.96
Corporate Travel Management Ltd $38,602.88

However, if you’ve been a shareholder over the last three years (or longer), are your unrealised gains at risk by holding on?

Domino’s Pizza 

At Domino’s half year profit announcement, the outlook was very rosy with sales, store growth and margin improvement leading to an expectation that growth in net profit after tax would be around 35% for 2015-16.

With a PE ratio of just over 75x earnings from 2014-15, an expected increase in net profit of around 35% would bring the PE ratio down to 55x 2015-16 earnings which is still extremely high.

The company is literally priced for perfection and I don’t see how the share price can remain at these lofty levels of almost $77, even if management perfectly executes its strategy to grow the company’s profits.

St Barbara Ltd

With a strong Australian dollar gold price expected to continue, there may be further scope for the St Barbara share price to rise further, but there’s a lot of risk here. The shares are priced at almost 73x last year’s earnings, but given how volatile the company’s earnings have been over the last decade, I’d be tempted to sell these shares and watch St Barbara from the sidelines.

Corporate Travel Management

Corporate Travel Management’s full-year guidance, provided at the first half year’s profit announcement in February, was for EBITDA to be around $68m which represents growth of 67% over 2014-15. With its most recent acquisition and integration of Travizon Travel in the US, management have indicated that they expect a strong second half for its North American operations with continued success expected for 2016-17 and beyond. All of Corporate Travel’s announcements this year have been positive resulting in the company’s share price trading at over 37x last year’s earnings. Given management’s track record, I don’t see any reason why they would not meet their already-provided guidance, but if for any reason the market doesn’t like what it sees on 26 August 2016, the company’s reporting date, the share price could fall a long way.

Foolish takeaway

I can’t predict what will happen when each of these companies report later this month, but given how expensive their respective share prices are already, any bad news (or even less-positive good news) will mean their share prices are at risk of a fall, at least in the short-term.

The best thing to do is to accept that share price volatility is normal and to mitigate this risk by ensuring you don’t have too much of your portfolio in any one stock.

If 40% of your portfolio is in St Barbara, I’d definitely sell some shares. Ditto though for any other company that makes up more than 20% of your overall portfolio.

Educate yourself in advance of the share-price possibilities too and, that way, any extreme share price moves downward also won’t have a material effect on your mental well-being.

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Motley Fool contributor Edward Vesely owns shares of Corporate Travel Management Limited. 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.

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