One of the great advice given by investment guru, the late Philip Fisher, was that one should exit a stock once the fundamentals of the stock starts to deteriorate. Or as Warren Buffett says he would hold on to a stock for many years as long as the economics of the business didn't change dramatically for the worse. (key word: 'as long as') Most investors look for the following telltale signs of concern to determine if a particular stock might become a 'loser': Declining sales quarter-to-quarter and year-to-year
It is such a great common sense advice.
Look at Megan. Few years back. Fiscal year 2002. Megan reported sales of 139.078 million. Net Profit was 23.807 million. And that is a nice profit margin of 17.03%. Now if anyone asked me back then, i would have to agree that perhaps Megan could have been a decent investment choice way back then in 2002.
But look at it now.
Things have changed.
Folks need to realise this factor.
What used to be good can change.
Good can become bad.
This is life.
And then good becomes bad, what do u want to do about it?
Take Megan into perspective.
Its current half year sales revenue is at 497 million. Its net earnings is 16.926 million.
We are now looking at a company with only a net profit margin of 3.4%.
And 3.4% net profit margin is not the same as 17.03%.
Isn't it crystal clear that the economics of the business has changed dramatically for the worse?
A company whose business economics was enabling the company to generate net profit margin of around 17% has DETERIORATED so much that the company is only generating a mere net profit margin of 3.4%.
And i am only talking about the earnings performance.
What about the debts issue?
Just take the simpliest of comparison. A year ago, same period, Megan only (only?) carried debts totalling 482 million. Now? Debts total 725.151 million. That's an increase of 243 million or an increase of 50.4% over a year.
Common sense question?
What kind of business in the world requires so much money?
And what kind of returns?
Well, according to Megan, during this period a net profit of made 53.675 million.
Well, if you look at it, perhaps you could argue that the profit is decent but the biggest issue is Where did Ze Moola go?
If they make soooo much, surely the piggy bank will show some signs of improvement. Right onot?
And then the trade receivables that practically went Ka-Booom!!
I mean it's truly incredible. Such a total farce!
A year ago, same period, trade receivables totalled 231.821 million.
Now? This trade receivables totals some 331.357 million. An increase of 99.536 million. An increase of 42.9%!
With the trades receivables blowing up by 42.9%, where is the justification for Megan to borrow soooooo much money?
Who on earth borrows money by so much and the only visible return or the only visible wealth generated is the money owed to the company?
Isn't Megan simply financing its customers?
And what if some of these customers debts turn bad? How then?
Is this the right way to run a business?
And from a business perspective, would you really want to own a business like this?
Is it or is not crystal clear that Megan's economic of business has changed dramatically for the worse?
Somtimes, I really wonder.
Is it really all that difficult to see?
Is it really all that difficult to see that perhaps we had made a mistake in our stock selection?
Humans make errors and will always making error over and over and over again.
Doesn't it just make sense to admit our mistake?
Or are we going to hold and hope that the market will become hot (and HOPEFULLY Megan moves up too) and in the process helping us to rectifiy our investment mistake!
Will the market really be that kind to us?
Or as Warren Buffett said, "Do we have to make money back the same way we lost it?"
I have read before that it is never easy distinguishing and differentiating between a temporary setback in business economics and a real collapse in the economics of the business.
Perhaps sometimes one is afraid to sell and acknowledge their mistake because they could be selling a stock after purchasing the stock just a couple of months ago.
Perhaps scared of being branded a trader or scared that such short term activities could develop into a nasty habit of buying and selling stocks too often.
Yes, I do agree very much with all of it but if one has made a mistake, shouldn't one admit to it?
What is so wrong in selling a stock because we realised that we have made a mistake in our stock selection?
Isn't it more important to do what is right?
What if the mistake gets bigger as the stock price could diminish as per the stock fundamentals?
Remember Warren Buffett's saying to stop digging when we find ourselves in a hole?
Here is an interesting educating article:
1) MARKET RULES: LET WINNERS RUN
One of the most common investing rules you hear quoted is Sell Losers and Let Winners Run, but there are exceptions...
In that article there is a check list of telltale signs of a potential loser ...
Rising debt levels
Declining profit margins
Rising inventory levels
Changes in regulatory or legal environment
Emerging competitiors or technologies
Rising interest rates
An emerging overall bear market
Events that negatively impact future earnings
Mergers and acquisitions
Institutional or insider selling
Dividend cut or elimination
Concerns over accounting procedures
Run the above checklist on Megan... :P
How many telltale warning flags do you spot?
Megan: Part II
Megan: Part III
Megan: Part IV
Megan: Part V
Most investors look for the following telltale signs of concern to determine if a particular stock might become a 'loser':
Declining sales quarter-to-quarter and year-to-year