High Growth Stocks Have Fallen. Are They Cheap Right Now?
It may be tempting to buy stocks when these start falling. Investors may feel that a stock pulling back represents a “once in a year” opportunity. However, we believe that investors should be very cautious about this strategy. Here the checklist we review when one of our names is down sharply:
What is the reason for the pullback?
A stock may be down due to company-specific news. The CEO may be leaving, the company might issue new shares, it might have lost an important customer… Investors should critically review whether the news is good.
- In case the company is issuing shares: this means that the company knows its stocks is expensive
- In case of management change: is the reason cited by the company credible? Or does it hide an uglier truth?
The stock may also be down because its sector / industry is pressured. Investors would then want to review whether this might signal the start of a rotation into other sectors.
- What are the macro elements suggesting? Inflation, yields, energy prices, supply chain constraints, business cycle, regulatory landscape, risk appetite might give good clues to investors
- Is the stock unnecessarily punished? Investors may then want to consider the next questions
Before the pullback, was the stock overvalued? After the pullback, is the stock cheap?
Before buying shares, we believe investors should review whether the stock was trading above its historical average.
- For review: Investors might want to review the Enterprise Value To Sales ratio, the price to earnings and review how key metrics have evolved over time (margins, cash flows, growth).
What is the current exposure to this company?
We maintain a diversified portfolio and seek to avoid concentration risk. We therefore review whether the stock that pulled back already represents a high proportion of our portfolio. If this is the case, we do not add to our position.
Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.