Rudi’s View: Lessons I Learned

Rudi's View | 5:15 PM

After my presentation and Q&A in Toowoomba, Queensland yesterday (having endured the teasing prior to the State of Origin later on the day) I sat down with a few of the local investors to talk investing and markets in a more informal setting.

By Rudi Filapek-Vandyck, Editor

It didn’t take long for the conversation to shift to stocks like Bapcor ((BAP)), Cochlear ((COH)), CSL ((CSL)), Domino’s Pizza ((DMP)), and IDP Education ((IEL)) – all have kept trending to ever lower share price levels over the years past.

While doing so, all have wrongfooted investors who bought in at what seemed “cheaply priced” stocks.

The first observation to make is, of course, that what looks “cheap” can still become a whole lot cheap-er.

There’s probably not a single reader who would dispute each of the companies mentioned has provided the market with plenty of reasons to keep paring back the share price.

Repeated profit warnings are but one angle to take.

But as most profit warnings tend to come out of the blue, the question asked was: how does one decide whether a cheaper share price is truly a bargain or the exact opposite, a value trap?

It’s always easier with hindsight but I do think there’s an uncomplicated and straightforward rule investors can apply – one I highlighted earlier this year before Cochlear and Bapcor delivered their latest profit warnings.

That rule is: Keep an eye on the news flow.

There are times when share prices weaken without negative news or development from the company or the sector.

This does not by definition imply such weakening is out-of-synch with what likely lays ahead, but more often this is due to temporary sentiment or the market getting uppity about a risk that may never eventuate.

This most definitely has not been the case for the companies mentioned. If we move backwards into history, we will find an elongated stream of bad news announcements and developments.

As I have come to discover over time, that’s the red flag we should all pay attention to as investors, in particular when it matters most: when we own shares in these companies.