Why is my stock going down even though it’s so good? Here’s 3 reasons why!

Why is my stock going down even though it’s so good? That’s a question many investors ask themselves. You could think like Warren Buffett and think the market will make the right call in the long-term, but that doesn’t make the paper loss any better.

In this article, we look at 3 possible answers to that question.

Why is my stock going down in spite of being so good? Here are 3 possible reasons

1. Your stock has a bad IR team

An ASX company may be a good company but fail just because it has poor IR (Investor Relations). To put it another way, a company may be able to sell its goods or services, but if it cannot sell itself as an investment proposition, it won’t be bought. This can be the fault of the firm that it has hired to run IR, or internal staff that runs IR, or perhaps management just isn’t following the advice of either of them.

The jump from private to public is always a big step for a company no matter where it is in its journey. There is far more scrutiny on the company from a much larger pool of investors. Now, one may accept that it is unreasonable for companies to offer a running commentary on its day to day operations. But it may not suffice to only update shareholders at reporting season or when the company needs capital. At the very least, the company should conduct meetings with existing and would-be institutional investors on a regular basis. Because they are the ones that determine the company’s share price more than retail investors.

The CEO selling his shares doesn’t help

Otherwise, it may just be a matter of luck as to whether or not companies go up or down. Take Cettire (ASX:CTT) for example. It benefited from the eCommerce boom and strong sales that persisted into 2022 and 2023. Nonetheless, the reclusive nature of the company’s CEO and his repeated sales of shares has impacted the share price. And of course, questions about its business model emerged that caused shares to shed over 35% between February and April 2024. If it was really much ado about nothing, maybe investors would have seen it as such if the company had engaged more with them. Or alternatively, maybe it is a big deal and investors can see it even if the company can’t.

2. It is not a hot theme

There are always good and bad stocks in any sector. But sometimes, the market may disregard companies just because they are in a sector perceived to be a poor space to be in. Just look at all the consumer discretionary stocks sold off just because investors feared consumers would cut back their spending. Yes, this was true for many companies. But not for all of them – just ask companies like Silk Laser and Breville.

The key if this scenario is true is to be patient with your stock and wait for it to re-rate because it will…one way or another. Perhaps private investors may see value in the company that most public investors cannot and a takeover will come. This has happened to companies including Silk Laser, Healthia and Pacific Smiles.

3. Maybe your stock isn’t that good

Yes, this is likely too. The key to figuring out if this situation is correct is to go beyond the metrics put out in your company’s annual report, especially if they are non-accounting metrics like Gross Transaction Volume. Read your company’s financial statements, particularly the cash flow statement, and see if the company’s words about how good things are match reality.

A company may be saying it is well positioned because it has good EBITDA (or even ‘adjusted EBITDA’), but actually has a loss because it has high interest and (lo and behold) interest actually is a cash outflow! At the end of the day, no company will tell you ‘We’ll just try our best but cannot provide any guarantees beyond that’. No, they’ll all say they have a good market, experienced management etc. This is true with some companies that say it, but not all of them.

Cash is still King

We’ve offered this advice before and we’ll offer it again. Whenever your company releases a quarterly report (something it only has to do if it is cash flow negative), you should ignore all the marketing fluff at first and go straight to the end of the report when you see the company’s cash balance and number of quarters of cash it has left. Then look at the rest of the cash flow statement, and only then everything else.

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