Should you sell shares if they report badly?

Reporting season is nearly here and many companies are already announcing when their report is going to be released.

The hope is that all of your shares report well and go up. But, life isn’t perfect like that.

There’s a very good chance that one or more of your shares will report something underwhelming and fall.

Firstly, it’s important to take into context what the actual numbers are. A business could report profit went up 30% and the share price goes down, or a business that reports profit went up 5% and the share price could go up.

Why would this happen?

Well, share prices are forward looking. The current share price has expectations about the business’ future profit built in. If that profit isn’t as high as expected then a share price can drop, even if the growth itself is impressive as a standalone figure.

A good recent example is Kogan.Com Ltd (ASX: KGN). It is down nearly 20% since announcing that FY18 earnings before interest, tax, depreciation and amortisation (EBITDA) is around 90% higher than FY17.

Another example is a2 Milk Company Ltd (ASX: A2M) which is down around 25% from its all-time high.

Perhaps Altium Limited (ASX: ALU), WiseTech Global Ltd (ASX: WTC) and Xero Limited (ASX: XRO) face a similar fate if they don’t meet expectations?

I believe the important thing to remember is why you invested in the first place. I initially invested in Altium shares a couple of years ago with the thought of where the business would be in the far future. By 2025 it could be a much bigger business.

I think there are only three good reasons to sell:

  • The valuation is far in excess of your own valuation. If that’s the case taking some profits off the table may be prudent.
  • The thesis has changed. For example, if you invest in a retailer and it decides to acquire a dairy farm then that may substantially change the reason why you bought shares of that business.
  • There is a better opportunity. Sadly we don’t have limitless money to keep investing into whatever we like, we must allocate our money to what we think is the best place, which may include selling something to buy something else.

So, just because a share goes down doesn’t mean it’s a ‘sell’. A decline in price could actually make it a buy!

I’m closely watching how these top shares do in reporting season. If one of them drops I’ll definitely look to increase my holdings.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended ltd. 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 Scott Phillips.

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