samedi 31 août 2019

How to react to a 30% drop on a single day?

You write that you haven't written about a single bad investment idea over the last two years and, in a matter of hours, one of your stocks drops by 30%. That's how the market works. There's always something happening to make you feel humble when you think you've achieved a certain level. At least, it shows once again that a portfolio with various stocks in it with no stock representing more than 10% of the portfolio could help to avoid catastrophes. Some people only swear by a concentrated portfolio, to me, it's the perfect path to failure.

That 30% drop happened with Ulta Beauty (ULTA) last thursday in afterhours. Yesterday (friday), the selloff was official and everybody was making very funny jokes about "Ulta Beauty's ugly day".

What happened and how to react?

Well, ULTA missed estimates by 1,4%, which is very little. And they said that full year's earnings would be about 12$ instead of about 13$ (8% lower than expected).

About 16 million shares were sold instead an average volume of 1 million on a single day. Everybody felt like Ulta Beauty was plague.

How come sales have drop that much? What does it mean? Did Amazon or another online competitor stole some sales?

I don't know. Usually, companies don't tell where the money has gone.

But, let's take a look at ULTA's EPS over the past 10 years:

2010: 1,16$
2011: 1,90$
2012: 2,68$
2013: 3,15$
2014: 3,98$
2015: 4,98$
2016: 6,52$
2017: 8,31$
2018: 10,94$
2019 (estimated): 12$

Annual EPS growth from 2010 to 2019: 34%
EPS growth from 2018 to 2019: 10%, which is quite a drop. But it's positive nevertheless.

How looks Ulta Beauty now?

If we expect an EPS growth of 10% next year, the stock is selling for about 18 times next year's earnings. It's not that expensive for a stock with a ROE over 30. Also, the company carries no debt which is great for acquisition or share repurchase. It's recession-proof (cosmetics).

Ulta sells a lot of stuff. They’ve got everything you need in a single place and there's processionals to help you.

So, I don't know if it's a buy, but to me it's not a sell either. You have a lot of stocks out there with an higher PE than that, that don't grow more than that, have a smaller ROE and operate in a much more cyclical sector.

To lose a few thousand dollars in a matter of hours is always a shock, no matter how big a portfolio is. That's why we should always mitigate the risk in various forms (20 stocks or more, various industries, etc.)

3 commentaires:

  1. The gods of investing and trading must be soothed and appeased so I will humbly try to disagree with the Penetrator on this one…As I dimly understand things, there are two types of risk…market risk (the risk of having your money invested in the stock market in general) and non-market risk (the risk that the company you invest in goes bankrupt or the CEO is a crook etc)…I’m mush more concerned about non-market risk so I try to learn about the companies I invest in…If one wants to spread his risk further why not just go to cash instead of diversifying your returns away with additional companies you may not know a lot about…It’s all more a matter of investing philosophy than anything else.

    The issue of how much diversification is enough has more to do with an investor’s individual temperament than anything else…There is a strong thought-form out there in the investing world that volatility is risk…I don’t believe that it is…For me risk is permanently losing my money…If an investor buys and holds for the long term, volatility is little more than noise…But this is an issue that every investor will have to decide for himself.

    To familiarize myself with the companies I invest in, I try to focus on the management teams involved and how clearly they communicate the business of their company with their shareholders…But that’s me…it’s a big world out there and everybody is different and at the end of the day, that’s what makes a market.

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  2. will see a bounce. down day was last day of Aug, a notorioualy light month, and last day is when funds square their books.

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  3. Oh the joy of seeing some growth stock that has been killing it miss the latest revenue target by around 2% and the stock plummets 30%. It happened to me when I owned skechers (SKX) and they were far surpassing their analysts' estimates quarter after quarter...and then...they miss by 2% when everybody expected them to keep crushing it. Oh the pain. You look on and you are incredulous. When that happens to a growth at a reasonable price stock (not some stock going for 500x next year earnings or a stock that has not yet become profitable) then you just hate life.

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