Rudi’s View: To Sell Or Not To Sell?

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In this week's Weekly Insights:

-To Sell Or Not To Sell?
-Conviction Calls and Best Ideas
-FNArena Talks

By Rudi Filapek-Vandyck, Editor

To Sell Or Not To Sell?

When it comes to investing in the share market, very few events impact as much on the human psyche as a falling share price. In particular as it goes on and on and on.

As the old joke goes: investing in shares is really easy. You buy low and sell high. And if someone asks what do you do when the share price falls? You respond with: those shares should not be bought!

Life inside the share market is a lot different from the theory and the investment books, and there can be a whole suite in reasons as to why shares fall in price. Plus it can happen any time, including immediately after you bought in, and hit your favourite and biggest holding as well as that mistake you rather not think too much about.

Most investor responses can be identified through two opposites: one either does nothing and waits for the shares to recover back to the purchase price or we too sell our shares, don't look back and move on.

Others might have downside protection in place such as automated stop-loss triggers or an ironclad, no exceptions rule such as sell from the moment the stock falls by -15% more than the market.

By far the most dangerous response is to simply buy more shares, and keep buying, until the average purchase price is exceeded by the share price that must, surely, start rising again at some point? Averaging down under such conditions might turn into a guaranteed route to bankruptcy as many have found out throughout the times.

A dud investment does not become a guaranteed winner by throwing more money at it, and neither does time necessarily work to its benefit, while the market doesn't care at what price we decided to purchase. Then again, not every price fall means our purchase is a dud, or that we made a mistake, or it'll never come good.

Sometimes a falling share price should be welcomed: we can buy more at a lower price! We can finally get on board! But also: I knew it was a mistake and this is the motivation I needed to get rid of it.

As investors, irrespective of our age and time in the market, we move through phases of accumulating experiences during which all of the previously mentioned sins are committed and those dilemmas are encountered.

We know the advice from the legendary Peter Lynch: know your companies and why you own them, but it takes a proverbial mountain of character-building experiences to truly understand it, and then live by it.

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Once we've managed to upgrade ourselves to the next level of becoming a better investor, there's always the next challenge through transitioning market dynamics, special circumstances, and rare exceptions. Share prices do not weaken on bad news only.

One such special circumstance is when our portfolio holding is suddenly under attack by shorters; market participants who position for and profit from a weakening share price.

Historically, some of the biggest fraud stories have been revealed by shorters who turned into investigative sleuths, including Enron in America, Wirecard in Germany, and sandalwood grower Quintis and asset manager BlueSky on the ASX.

But outside a rather small parcel of success stories, shorters have by no means covered themselves in lots of glory these past few years in Australia.

All of Amcor ((AMC)), Blackmores, Corporate Travel Management ((CTD)), Fortescue Metals ((FMG)), Nearmap, NextDC ((NXT)), Macquarie Group ((MQG)), Rural Funds Group ((RFF)), Seek ((SEK)), TechnologyOne ((TNE)), Vulcan Energy ((VUL)), and Wisetech Global ((WTC)) have found themselves under attack from shorters at some point in the years past.

In all cases the share price came under attack, in first instance, but the impact eventually only proved temporary. Vulcan Energy is the one exception, but we cannot blame the shorters; they publicly apologised and withdrew their negative thesis.

The likes of NextDC, TechnologyOne and Wisetech Global recently traded at all-time highs, which tells us all about the validity behind the attacks!

Once under attack, the share price might only have one direction of choice and that is down. Shorters often coordinate, and like wolves, they attack in pack. With the media as conduit, the news cycle often turns negative and there's a fairly decent chance more shareholders decide to join in the selling. Trends reverse, technicals look bad, people seek to limit losses, panic kicks in, et cetera.

As the share price drops, and the losses accumulate, often quickly, the early experience can be quite scary. What if the shorters are correct and fraud and obfuscation rule the accountancy books?

Some investors might decide to simply not take the risk. We're all into it for generating a decent return, not necessarily through fighting wars or turning into activist investors.

But if history is our guide, most short theses don't play out, apart from the immediate negative impact on the share price under attack. I, for example, have also decided on occasion it's better to avoid the agony and the headaches, but I am extremely pleased I remained a shareholder in NextDC and in TechnologyOne, and the FNArena/Vested Equities All-Weather Model Portfolio has returned as a shareholder in Wisetech Global.

Looking back at those experiences from the past, I do think the proverbial "secret" lays in that statement by Peter Lynch. The more you know about the company, the more confidence you can have in management and operations, and in the fact there's no-one cooking the books.

Shorters be damned!

Having said all of the above, the proposition is never 100% black or white. Shorters do sometimes have additional information, and they do sometimes get it right. As investors, we thus must keep an open mind, and try to make an educated assessment. [Note: short positions are not always "naked". A corresponding long position in a similar stock, or an options position, for example, may offset the short.]

In the initial days of the aforementioned All-Weather Portfolio, law firm Slater & Gordon had been included, which was then one of the emerging success stories on the local bourse. Until management and the board decided the story had outgrown Australia and a large acquisition in the UK was announced.

Those familiar with the UK assets knew Slater and Gordon had suddenly taken on a lot of risk, involving a mountain of debt and assets of questionable quality.

Within no time, short positions in Australia were increasing and the share price sat under heavy pressure.

Long story short, I think the Portfolio sold all shares at a loss of -20%, or thereabouts, as the more information became available about the UK acquisition, and about Slater and Gordon's accountancy practices, the more I realised risk nor time were on our side.

Prior to those events, Slater and Gordon had been one of the best performing holdings in the Portfolio. Seeing it turn from a prior 'Champion performer' into a -20% irreversible loss was one of those seminal experiences we simply need to have as active investors.

This acquisition literally broke the company. The share price ultimately lost -95% from its peak and never recovered. I know people who never sold.

Slater and Gordon was acquired and delisted in April of this year. It's the one experience as to why I keep reminding investors: it's never too late to sell.

Outside of being extremely lucky, time does not work in favour of substandard or damaged companies.

Investors tend to underestimate the mental relief from removing such a grave mistake from the portfolio, and being able to look forward to better and more promising opportunities yet again.

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Not selling is the bigger challenge for investors sitting on a long-lasting good news story. We should all aspire to witnessing our investments grow by many multiples over time. Imagine buying BHP Group ((BHP)) shares at $9 in 2000, or CommBank ((CBA)) shares below $26 in 2008, CSL shares below $30 in the GFC-aftermath or TechnologyOne shares below $5 in 2014.

Would we have held on to them throughout the multiple ups and downs? Maybe that is the real question.

I definitely feel like I have been punished multiple times over since the All-Weather Portfolio sold out of Audinate Group ((AD8)), Pro Medicus ((PME)), and REA Group ((REA)).

Those familiar with my research know I regard all three as part of a select group of High Quality performers on the ASX, in the same vein as I like to refer to CSL, Carsales, Goodman Group ((GMG)) and TechnologyOne.

Back in 2021, when bond markets resetting and central bankers changing course brought daily volatility and selling pressure to global equities, the decision was made to allocate more to cash. To weather the storm and limit the short-term damage. The share market being the share market, there will always be opportunities to jump back on board.

In theory, yes. In practice, there are times when market momentum and our own mind work against us. The local share market is arguably now in its third month of struggle, but those share prices refuse to join in the weakness for so many others that are owned in the Portfolio. Any share price weakness to date hardly registers on the share price charts!

Memento to ourselves: sometimes selling out is the dumbest thing to do.

Then again, I could be too demanding. Shares like Aristocrat Leisure ((ALL)), Carsales, Goodman Group, NextDC, and TechnologyOne have been an uninterrupted part of the All-Weather Model Portfolio since the early beginnings. Successful investing is a lot like playing golf; it's never about being perfect.

At least Wisetech Global shares received a real shellacking in August, allowing the Portfolio to once again add the stock.

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Many of the conclusions we draw are, of course, done with hindsight and we should always be careful not to dwell too much on those success stories we missed out on. Investors casually forget how much information was not available at particular points in the past, and thus how much luck plays a part in short term outcomes.

For good measure: short term can be a matter of days or weeks, but it can also be a given year, depending on context and general conditions.

The All-Weather Portfolio, like so many other active investors, had adopted the view that unprecedented central bank tightening and a steep reset in global bond yields would plausibly spell trouble for economies, corporate profits and share market valuations.

That scenario has not played out, at least not until now.

Part of the portfolio's risk management consists of allocating funds to cash. Raising cash levels means shares need to be sold.

Luckily, when such pivot moments arrive, it always makes us realise there's at least one investment in the Portfolio that is probably an error of judgment. Hence, extreme share market volatility helps us keeping the house clean and in healthy shape.

Some of the decisions made in years past relate to High Quality success stories that, unfortunately, lost their mojo and should therefore no longer carry that label.

Ramsay Health Care ((RHC)) is one such case in point. A great local success story that started to wilt in 2016 and things never got better again. Another example is Iress ((IRE)) which today is equally but a shadow of its former self.

Sometimes the change is not in control of the company itself. Bapcor ((BAP)) is one of the most resilient business models listed on the ASX, but the shares are no longer in the Portfolio because tomorrow's cars are electric and the company has yet to find a way to adapt.

On my observation, investors stick too long to the Quality narrative, long after the label no longer applies. It shows we're human. Equally: these are longer-winded processes. Companies that have never been on my radar, but that equally lost their Quality tag in years past include Westfield, Lendlease, Orica, and Westpac.

Ultimately, the loss of Quality shows up in disappointing investment returns. Time does not work to the benefit of the weak or the weakening. Not that your typical value investor cares about any of this, but they usually don't stick around for long either.

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One sector on the ASX that has lost its former mojo this year is healthcare. Sonic Healthcare ((SHL)) shares, now trading below $30, have effectively returned to pre-covid times. The same observation applies to CSL ((CSL)), now trading below $250 with just about everyone telling me the technical picture looks "awful".

It's worse for others, with the notable exception of Pro Medicus, of course, and Cochlear ((COH)).

This is not simply a local phenomenon, with the sector lagging globally. Probably the most dumbfounding observation is nobody seems to offer a valid explanation. I am inclined to look at rising bond yields myself, but there's enough inconsistency around to dismiss that theory in isolation.

Do all roads start and begin with the new miracle drugs from Novo Nordisk and Eli Lilly?

We know this is what is weighing on the share price of ResMed ((RMD)) with investors taking the view success of these ever-so-popular weight-loss drugs will turn others into losers. Those 'losers' have been identified as every healthcare company whose product or service relates to obesity.

Extend this relationship to the max and virtually every healthcare company will be affected… on the premise that Novo Nordisk and Eli Lilly are about to eradicate obesity from modern day society.

Both CSL and ResMed remain cornerstone holdings in the Portfolio. The first should resume its strong pace of growth in 2024 and ResMed shares are arguably as cheap as they've been in a mighty long while.

Part and parcel of being invested in the share market is that sometimes we simply cannot explain why things are happening in the here and now. But as long as we can trust in the companies behind the share price, we can trust in that share price recovering back to fundamentals.

ResMed is scheduled to release its next quarterly update on October 27.

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In April 2019, I wrote a story titled The Art Of Selling Non-Performing Stocks, which proved rather popular among readers both at FNArena and elsewhere:

https://www.fnarena.com/index.php/2019/04/04/the-art-of-selling-non-performing-stocks/

Conviction Calls and Best Ideas

Equity markets are increasingly displaying late cycle dynamics, observe global strategists at Morgan Stanley. This is their preferred reading as to where markets are in the current cycle.

"In our view, equity investors should avoid rotating into early-cycle winners like consumer cyclicals, housingrelated/interest-rate-sensitive sectors, and small caps. Instead, we believe a barbell of large-cap defensive growth/quality with late-cycle cyclical winners like Energy and Industrials should outperform."

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Portfolio strategists at Canaccord Genuity remain Overweight fixed income and Underweight equities.

The broker's Australian Model Portfolio is markedly Overweight Consumer Discretionary and Consumer Staples, as well as Healthcare.

Stocks to achieve these oversized exposures include The Lottery Corp ((TLC)), Wesfarmers ((WES)), Endeavour Group ((EDV)), Woolworths Group ((WOW)), Treasury Wine Estates ((TWE)), Ramsay Health Care, Sonic Healthcare, and CSL.

Both Energy and Mining are kept slightly ahead of local market weights through Woodside Energy ((WDS)), BHP Group ((BHP)), Rio Tinto ((RIO)), South32 ((S32)), plus Amcor ((AMC)) as the latter is officially categorised as a 'Materials' stock.

Banks, including Macquarie Group ((MQG)), are held but as an Underweight allocation, and the same goes for insurers/diversified financials through Suncorp Group ((SUN)).

Goodman Group ((GMG)) represents the full exposure to real estate.

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Analysts at Morgan Stanley have started to nominate their Key Picks post the August reporting season in Australia.

Thus far companies nominated are:

-IPH Ltd ((IPH))
-Life360 ((360))
-Lovisa Holdings ((LOV))
-Propel Funeral Partners ((PFP))

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Analysts at Citi have opened a 90-day Catalyst Watch on South32 ((S32)) – effectively launching a fresh trading idea for the remainder of the running calendar year.

Their reasoning: South32 was hard hit from EPS downgrades post financial result in August, but since prices for coking coal and alumina are up. This will force consensus forecasts to lift and the share price should benefit from it.

Citi has upgraded to Buy with a price target of $3.80.

FNArena Talks

I'll be MC-ing and presenting at the ATAA 2023 NATIONAL CONFERENCE, in Sydney on the 20th – 22nd October.

Investors interested can still sign-up and enjoy the full in-person experience on offer, or opt for the full streaming service.

For more information and to register visit www.ataa.asn.au

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (20 since 2006); examples below.

(This story was written on Monday, 2nd October, 2023. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

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