How to profit from a falling share market

If your portfolio is anything like mine then you will have been left wondering if you will ever see share prices rise again. While the US share market has continued to climb to record highs, the Australian equivalent, the ASX has been left staggering like a lonely old man after losing his shirt on the pokies.

If you are distraught and you feel like throwing your hands in the air and cashing in your chips, you are not alone. While it is natural to wish the pain would go away and selling seems like the easiest option, it is important to stick to your long-term plan, buying great companies at great prices.

During times of uncertainty for the world economy such as Donald Trump’s surprise election win, I cross my fingers and hope that companies I am interested in either issue a large profit upgrade or a temporary profit downgrade. Note, I said temporary downgrade not a permanent one!

The reason that I hope for either of these events to occur, is that during times of uncertainty the market will often overreact to bad news, while underreacting to good news.

Let me give you a few examples.

Good news

Webjet Limited (ASX: WEB)

On November 8, Webjet issued earnings guidance for FY2017 for EBITDA of $78 million or $60 million for continuing operations. This represents a huge 64% rise over FY2016. When announced the share price traded as much as 16% higher before falling back to around the same price before it was announced.

Domino’s Pizza Enterprises Ltd. (ASX: DMP)

On November 7, the company upgraded EBITDA growth to be in the region of +30% (up from +25%) compared to the previous underlying result. It also reconfirmed underlying NPAT growth at +30%. It also announced astonishing Australian same store sales of 17.66% over the previous corresponding period. When announced the share price rose by 6%, but has since fallen back to pre-announcement levels.

Aconex Ltd (ASX: ACX)

On October 25, Aconex flagged three temporary problems, but importantly the company was forecast to continue growing strongly.

The issues were:

  • Lower-than-expected growth of the European business (“Brexit” uncertainty and accelerated transition to selling Aconex in the UK)
  • Impact of GBP and Euro currency movements on revenue
  • Oil price uncertainty – delays in decision making in the Middle East.

Since that announcement the share price has fallen over 25%.

Foolish takeaway

Investing can be made easier by turning down the noise of daily share price movements and taking a longer term view of the business. While investors cannot control the share price they can control the quality of the business they invest in and the price they are prepared to pay.

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Motley Fool contributor Alan Edmunds owns shares of ACONEX FPO, Domino's Pizza Enterprises Limited, and Webjet Ltd. 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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