Last week was rough for the Australian share market, with the ASX tumbling 4.6% on the back of a global rout in equities. In the US, the Dow Jones had its worst single day points drop in history on Monday, shedding 1,175 points or 4.6%. In London, the FTSE dropped 1.5%. Chinese stocks fell over 10%. Market contagion was spreading.
But even amongst all this gloom there were some individual performances that were astoundingly bad. Myer Holdings Ltd (ASX: MYR) sunk 13% lower. Tabcorp Holdings Limited (ASX: TAH) fell 13.5%. But leading the way was cloud-based logistics software developer WiseTech Global Ltd (ASX: WTC), which dropped 18.6%.
This was particularly sobering for me because I had only recently became a shareholder in WiseTech.
Why did I buy?
It's hard to believe now, but being a shareholder in WiseTech meant something vastly different a week ago.
WiseTech's 2017 financial results were strong: revenues of $153.8 million were at the upper end of the company's guidance, and underlying net profit increased by 124%. And with WiseTech forecasting its full year 2018 revenues to increase by 30%-37% to between $200 million and $210 million, I was sure I was onto a winner.
And everything was looking rosy. In fact, in the space of just a few short weeks, the value of my shareholding had jumped 18%!
The company was pursuing an aggressive M&A strategy, and I was along for the ride. In December 2017 alone it acquired Australian warehouse management software developer Microlistics as well as two European customs solutions providers.
Even last week, as its share price was falling further into the red, WiseTech announced that it had bought leading Belgian freight logistics software developer Intris. This glimmer of good news stalled the sell-off momentarily, but on Friday the rout was back on and shares in WiseTech tumbled a further 7%.
So what went wrong?
Over the course of 2017, each time WiseTech announced a new business acquisition (there were 11 in all), it drummed up more investor excitement. Before the share price fell off a cliff last week, WiseTech was trading at close to 150x earnings.
There was some herd mentality around WiseTech, and I'd allowed myself to be sucked into it. This is a classic case study in what happens to companies with unsustainable price multiples: when the market gets spooked, the most expensive stocks get hammered the hardest.
However, as I survey the rubble of my investment, I can at least console myself with the knowledge that the underlying company hasn't changed.
WiseTech is still pursuing the same aggressive M&A growth strategy, as evidenced by its recent Belgian acquisition, and it continues to integrate these new businesses into its expanding logistics platform. And there haven't been any revenue forecast downgrades to get seriously worried about.
So if I believed in the company's long term growth potential a week ago, I should still continue to believe in it today – and not get flustered by short term panic in the market.
So I'll ride this out. But you should take my experience as a lesson: always look for value first, and don't get too swept up in market hype – it could come back to bite you when things get tough.
