We are now just two days from the start of August, which means the second ASX stock earnings season of 2025 is about to begin in earnest.
Every year, most ASX shares report their latest results in February or March, and then again in August or September. This gives ASX investors a chance to go over their companies' books and see how they performed in the most recent half-year period.
Earnings season is one of the most consequential periods on the calendar for a company's share price. It's the time when we often see the largest moves in share prices, with investors reacting in real time to how a company fared during its most recent reporting period, as well as the challenges or opportunities that a company can flag for the future.
Sometimes, companies can surge in share price if the profits, earnings, or dividends come in higher than what the market expected. Conversely, companies' stock prices can also plunge if the numbers that they show disappoint investors.
Today, let's discuss what investors can do if they find themselves dealing with the latter situation.
Picture it: An ASX stock in your portfolio has just reported its latest earnings. You log on to check your share portfolio and discover that the market seems to have panicked after seeing those earnings, sending the shares of this company down by more than 10%. What should you do?
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Buy, hold, or sell: How to treat an ASX stock that drops 10% on earnings
Well, the initial reaction might be to join the herd of sellers and cash out as soon as possible before you lose even more money on this stinker of an investment.
That indeed might be the wisest path to take. But it might not be. You also have the option of doing nothing. You could also take advantage of the cheaper share price to buy even more of this ASX stock.
But how does one know which of these paths is the best to take?
The first thing to do if you find yourself in this situation is to understand why your ASX stock is dropping. Is it because revenues or earnings weren't up to expectations? Perhaps the company is facing a temporary setback, such as weather damage or a supply chain issue. Or perhaps demand for the company's products isn't measuring up to what management had previously guided towards, indicating a long-term structural decline in its business model.
The answers to these questions should dictate your response.
The market is fickle
The stock market is a very near-sighted institution. Many investors are looking for easy money, so if a company is facing short-term challenges, many investors often sell out, even if it is obvious that earnings will be back to normal in a year or two. These are the sorts of situations when it can often make sense to just hold on to one's shares, or even buy more at a cheaper price.
However, if sales and revenues are lower than what management previously told shareholders to expect, and it is beginning to look like a pattern, it might indicate that selling out now could be the right move.
Capitalism is a brutal business, and it's not uncommon for a company's products to be left behind by changing tastes and market disruption. If you suspect a stock you own is facing these issues, it could indeed be worth selling out if the numbers confirm your suspicions. There's no shame in calling an end to a bad investment.
If an ASX stock in your portfolio indeed gets a post-earnings shock, it might be worth asking yourself why you bought and bet on the stock in the first place. If that initial reasoning looks broken following an earnings report, it might be time to sell. But remember, always sell because of a reason, not because other investors are. It's often the temporary pullbacks that allow the most successful investors to make their largest gains.
