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.
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Why is my stock going down in spite of being so good? Here are 3 possible reasons
1. Bad IR
A 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. 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.
2. Not a hot theme
There are always good and bad companies 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.
3. Maybe it 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, 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, but not all of them.
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