Technology Eats the World: Global Mobility Accelerates

by mktogether-blogs | Aug 18, 2023 | Stock Insight, Technology

Technology Eats the World: Global Mobility Accelerates

10/8/2023

Despite facing a raft of challenges including higher interest rates, inflationary pressures and a cooling global economy, the share prices of technology companies have shot higher this year. Electric vehicle pioneer Tesla Inc (NASDAQ: TSLA) has more than doubled year-to-date, while chip-maker NVIDIA Corp (NASDAQ: NVDA) share price has tripled, owing to investor enthusiasm for artificial intelligence.

In fact, at the end of May, the magnificent seven tech giants, which also include Alphabet (NASDAQ: GOOG), Amazon (NASDAQ: AMZN), Meta Platforms (NASDAQ: META), Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) accounted for over 70% of index gains.

We discussed earlier in the year our continued interest in innovation, specifically regarding electric vehicles and the global mobility revolution. There is still considerable technological progress required and time for market disruptors to emerge, presenting discerning investors today with the opportunity to get in early on what we see as an incredible investment megatrend. Below, we will provide an update on the recent performance of three companies playing an integral role in the mobility transition, before delving into broader industry tailwinds and developments.

Tesla: The Power of Compounding

Tesla achieved another record quarter, delivering its best production and delivery result to date. Model Y production increased 90% year-on-year and is the best-selling vehicle of any kind in Europe. Total production including Model Y and Model X increased 86%. Tesla also set a new record for revenue, with the three months to June 30 generating US$24.9 billion.

Tesla’s operating margin finished at 9.6% for the quarter, a fall on the highs made in 2022, however, remains above the industry average and includes price reductions made earlier this year. For comparison, legacy automaker Ford Motor (NYSE: F) achieved an operating margin of 4.5%.

Production of the highly anticipated Cybertruck will launch at the end of this year. It will be the first sub-19-foot truck – the typical length of a garage – that has both four doors and a 6-foot boot bed. The Cybertruck will break many conventional auto practices, in line with how Tesla thinks about vehicle engineering, manufacturing and technology.

Several companies and competitors, including Ford, General Motors, Mercedes, Nissan, and Volvo will adopt North American Charging Standards – Tesla’s in-house charging standard developed over a decade ago. This will further widen the electric vehicle charging network available to Tesla owners and encourage electric vehicle adoption.

Management reiterated Tesla’s goal of rapidly scaling production as quickly as possible. In 2021 the company guided to a 50% annual growth rate. Some years will be faster, including 2023, while others may be slower. However, this compounding effect, if achieved, will be unrivalled by other large companies. Five years of 50% growth would grow production by 7.5-times increase, while ten years would increase deliveries 57-fold. Investors can expect plenty of growth from Tesla in the years ahead.

NVIDIA: The World’s AI Engine

Shares in chip maker NVIDIA have exploded 217% this year fuelled by investor zeal for artificial intelligence; it is now just one of seven US companies to reach the coveted $1 trillion valuation. NVIDIA became the poster child of the artificial intelligence revolution when ChatGPT, a language processor that produces human-like conversation and text, was released in November powered by NVIDIA chips.

As the market leader, NVIDIA’s chips are essential to building the most innovative artificial intelligence applications. There is now a scramble by major tech behemoths, including Google and Microsoft − who are dedicating billions of dollars of investment to artificial intelligence applications − to source the required power and computational capacity.

“It’s more profound than fire or electricity” – Sundar Pichai, Alphabet (parent company of Google) CEO

“GPUs at this point are considerably harder to get than drugs” – Elon Musk, Tesla CEO

“It’s like toilet paper during the pandemic” – Sharon Zhou, Lamini CEO

NVIDIA benefits as the hardware platform of choice. Chief executive Jensen Huang summarises it best: “We’re the world’s engine for AI”. Using NVIDIA’s products, DNA sequencing reduces from weeks down to hours. Amazon uses it to power its autonomous robots and optimise warehouse space. Mercedes uses the NVIDIA platform for its autonomous driving technology.

https://www.youtube.com/watch?v=IVTyLYupECI

In its most recent update in May, NVIDIA said it expects to achieve US$11 billion in sales next quarter, blowing away analyst expectations of US$7 billion and reflecting the insatiable demand related for artificial intelligence and language models. Impressively, this comes despite recent intervention by the US government’s to cut off China’s supply to the most advanced semiconductors, which NVIDIA estimates will cost the company US$1.6 billion in revenue annually.

Uber: Leader in Mobility

Uber Technologies (NYSE: UBER), the company behind the popular ride-hall app, achieved gross booking growth of 18% to US$33.6 billion for the second quarter of 2023. Travellers continue to outsource travel needs, with mobility bookings up 28%. Demonstrating an ability to push through price increases, take rates in the mobility segment increased from 26.6% to 29.3%. Moreover, delivery bookings are up 14%.

Uber announced a partnership with Waymo, Google’s autonomous vehicle driving fleet, to make vehicles available on the Uber platform starting in Phoenix, Arizona. This is the first step towards the mass adoption of autonomous vehicle networks, and while still nascent, provides a glimpse of what investors can expect in the future.

Management has turned its focus towards profitability, with Uber producing an operating cash flow of US$1.2 billion and a free cash flow of US$1.1 billion. Adjusted earnings have more than doubled, and there is a clear cadence towards expanding profit margins.

From an operational standpoint, Uber continues to attract and retain customers on its platforms. Monthly active customers increased 12%, while trips jumped 22%. The Uber One membership platform is now available in 15 countries including Australia and the United States, encouraging customer loyalty and building a recurring revenue base. The membership includes free delivery orders, 5% off rides and guaranteed arrival estimates.

Global, China Sales Accelerate

In the first half of 2023, the number of plug-in vehicles, which include both battery-electric vehicles and plug-in hybrid vehicles, increased by 40% from the prior corresponding year. Plug-in vehicles now account for 15% of total car sales globally.

China continues to lead the world vehicle adoption, accounting for 57% of global new vehicle registrations in June. The top five automakers command over half the markets share of of all plug-in registrations:

BYD – 21.4%
Tesla – 15.2%
Volkswagen – 7.3%
Geely-Volvo – 6.2%
SAIC – 5.5%

Infrastructure Investment Soars
Economies have taken meaningful strides recently to build out the required infrastructure for the global mobility transition. Manufacturing construction in the United States has hit levels not replicated since 1981. Encouraged by the US$52.7 billion CHIPS Act, companies are building out domestic supply chains and foundry capacity for chip producers. Taiwan Semiconductor (TPE: 2330) will build two fab plants in the US, however is pushing back it’s timeline for US domestic production with onshoring expected to begin from 2025.Japan is taking steps to encourage fast-charging infrastructure. The Ministry of Economy, Trade and Industry will set standards requiring operators to increase the current output of chargers to at least 90kW, more than twice the current average, by 2030. For high-density areas, chargers are expected to be 150kW. Chargers are also expected to be installed every 70km along highways and will be supported by subsidies.The European will also require fast charging stations every 60km along the EU’s Trans-European Transport Network, the main highway network spanning from Portugal to Norway to Greece. The new regulations will come into effect in 2025 and aim to eliminate all “range anxiety” for existing and prospective electric vehicle owners.
Regulation Bolsters EV Adoption
The US has proposed new fuel-economy regulations that would increase how far a vehicle must travel for a given volume of fuel. Automakers would need to sell a portfolio of cars and trucks averaging 24.7 kilometres per litre of fuel, an 18.3% increase on the current stands for the model year 2026.While the policy won’t mandate electric vehicles, it implicitly forces automakers to increase electric vehicle sales in order to comply. In April, the Environmental Protection Agency proposed separate rules that would curtail tailpipe emissions. It’s expected that this would require two-thirds of new vehicles to be sold by 2023.
The TAMIM Takeaway
The technological advancements and shifts in global mobility, particularly in the realm of electric and autonomous vehicles, remain at the heart of what is shaping the investment landscape today. Despite short-term economic headwinds, the performance of industry leaders like Tesla, NVIDIA, and others underlines the unyielding faith investors place in the transformative potential of this sector. As the wheels of innovation continue to turn, opportunities will undoubtedly arise for those with a keen eye on the horizon. It’s crucial for investors to remain informed, agile, and forward-thinking. With the world on the cusp of a mobility revolution, the road ahead is electrified, autonomous, and rife with investment promise.

Disclaimer: As of the date of publication GOOG and AAPL are as at date of article publication. Holdings can change substantially at any given time.

Viva Leisure’s share price lifts on strong 2023 results

by mktogether-blogs | Aug 14, 2023 | Stock Insight

Viva Leisure’s share price lifts on strong 2023 results

15/8/2023

Viva Leisure Limited (ASX: VVA) a market leader in the personal wellness industry, announced last Friday an impressive set of full year 2023 results.

Despite cost of living and inflationary pressures, revenue increased 55% to $141 million and Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) increased by 429% to $29 million. The share market lapped up the numbers with the share price increasing 11.54% on the day to a 52 week high of $1.45. You can read up on our previous commentary around the business here.

Viva Leisure offers a diverse range of facilities within the health and leisure industry. Viva Leisure’s mission is to connect fitness and wellness to as many people as possible and aims to provide its members with affordable, accessible and high quality facilities. Its strong brand portfolio includes Club Lime, Pinnacle Health Clubs, Fit n Fast, HIIT Republic, and Plus Fitness positioning itself to be a leader in the thriving wellness market.

Viva Leisure CEO and Managing Director Harry Konstantinou spoke glowingly of the result:

“Our FY2023 results underscore the resilience and robustness of Viva Leisure’s strategic direction and operational capabilities. The impressive 55.4% surge in revenue to $141.2 million, primarily driven by our organic growth, speaks volumes about our team’s commitment and our members’ trust. The outstanding 429.2% rise in EBITDA to $29.2 million and the EBITDA margin reaching 20.7%, despite external inflationary pressures, are testaments to our enhanced operational efficiency and improved margins.

We’re particularly heartened by the significant improvement from last year in NPAT (pre-AASB16) of $8.8 million representing a $14.3 million improvement over FY2022. Our balance sheet and free cash flow remains strong, and our membership growth, coupled with the increase in utilisation rates, indicates the unwavering demand and satisfaction of our members”.

The Big Wins

Membership and Location Growth

Throughout 2023 corporate membership increased by 14%, reaching 181,950 members, while network membership rose by 7.2%, totalling 343,325.

Viva expanded its reach, adding 20 new owned operating locations, growing from 151 in FY2022 to 171 in FY2023. Total network locations now stand at an impressive 346 as of June 30, 2023. Notably, Viva completed eleven strategic acquisitions, including key corporate buybacks, and opened nine greenfield sites. Like-for-like membership saw a 5% rise, reflecting the ongoing success and maturation of Viva’s locations.

Utilisation and Margin Expansion

The month of June 2023 achieved record portfolio utilisation and could have been higher had it not been for multiple club openings in the month.

For the full year Viva’s utilisation rates improved by 340 basis points and increased to 72.7%, showcasing strong demand and heightened customer satisfaction. Viva estimates utilisation based on maximum capacity per location, being 2 members per square metre for Health Clubs and 1 member per square metre for Boutiques. Improving utilisation rates across the portfolio enhances margins with limited additional costs for new members. Utilisation decreases temporarily as new locations open and rises as locations add members. Viva’s long term utilisation target is 75-80%.

Non-Membership Revenue & Innovation

Viva is looking to capitalise on in-house developed technology platforms, billing services, and unique apps which has the potential to add to its already significant non-membership revenue base.

Non-membership revenue currently makes up $16 million per annum, and is anticipated to increase to $20 million annually when Viva Hub licensing fees, Viva Pay processing fees, and Digital Signage initiatives reach full capacity.

Financial

Viva achieved a significant turnaround in its financial performance with statutory Net Profit After Tax (NPAT) improving remarkably, shifting from a loss of $12.1 million in FY2022 to a positive $3.4 million.

As a result, diluted earnings per share transformed from negative 13.1 cents to a positive 3.61 cents per share. As of 30 June 2023 Viva has $6.8 million in cash on hand having seen an outflow of $3.2 million for the year. Considering Viva’s significant capital requirements, a substantial portion of its operating cash flow is reinvested into the business for building leases and equipment payments

Investors should consider that while Viva’s margins and cash flow are robust enough to support the addition of new locations, it’s essential to acknowledge certain financial nuances. Excluding the non-cash expenses of depreciation and amortisation, employee costs rank as Viva’s predominant expenditure. With rising superannuation and minimum wage obligations, there’s potential for some pressure on the company’s margins, cash flow or cash reserves..

Outlook

Looking forward, Viva is incredibly bullish following its encouraging 2023 results.

The FY2024 upgrade program has been expanded and accelerated, targeting 27 locations to be a part of the program. 11 new Greenfield locations were secured and a further 12 Greenfield locations are under negotiation as well as the consideration for additional acquisitions.

Viva’s strong brand portfolio and strategic expansion, including acquisitions, has solidified its position as a market leader in the personal wellness industry. The company’s focus on operational efficiency, innovation, and member satisfaction has yielded impressive results, and with a robust outlook for further growth, Viva’s future prospects appear bright.

U.S. Credit Rating Downgraded by Fitch

by mktogether-blogs | Aug 14, 2023 | Economy, Market Insight

U.S. Credit Rating Downgraded by Fitch

10/8/2023

Fitch announced last week that it downgraded the United States’ long-term credit rating from the AAA (the highest possible rating) down to AA+ (the second highest rating). For those that are unfamiliar, Fitch is the least well-known of the three major credit rating agencies, along with Moody’s (NYSE: MCO) and Standard & Poor’s (NYSE: SPGI).

Fitch cited both financial and governance reasons for the downgrade, stating:

“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades.”

In particular, Fitch described a “steady deterioration in standards of governance”. This included the recent tightwire negotiations in June regarding the infamous debt ceiling (which we previously discussed in our weekly newsletter) that once again risked the first ever default for the United States. Fitch had warned that this may result in a cut to the nation’s credit rating back in May, when clashes began between Democrats and Republicans over raising the borrowing limit. While the immediate crisis was averted (the debt ceiling has now been extended until January 2025), Fitch believes that in which the deal was negotiated has eroded confidence in the government’s fiscal management.

Fitch also stated an increasing level of extremism in U.S. politics as another factor in issuing the downgrade. Most significantly, Fitch highlighted in a meeting with Biden administration officials the January 6th insurrection in Washington, D.C. as a significant threat to the stability of U.S. governance. Coincidently, Fitch’s decision to downgrade its credit rating of US debt came on the same day former US President Donald Trump was indicted for his conduct when trying to overturn his 2020 election loss.

Finally, Fitch attributed part of the downgrade to the size of the country’s ever-expanding debt burden, which is expected to reach 188 percent of gross domestic product (GDP) by 2025. This level of debt is more than two and a half times higher than the AAA median of 39.3 percent, and is only likely to increase given expanding health costs and a growing interest burden as borrowing costs have risen.

Fitch Follows S&P’s Lead

This is actually not the first time that the credit rating of the United States has been downgraded. Back in 2011 (after having just won the midterms) the Republican Party refused to raise the debt ceiling without major future spending concessions from President Obama’s administration. In an almost replica of the most recent saga that unfolded in June this year, talks repeatedly broke down and were finally resolved at the last minute. This led to considerable market volatility and uncertainty, which caused leading credit rating Standard & Poor’s to cut its rating on US debt from AAA to AA+–a rating that has remained unchanged since this time. Until then, the US debt held a perfect credit ratings record since Moody’s Investors Service first assigned the United States an Aaa rating in 1917 (Moody’s has retained its rating of Aaa, the equivalent of S&P’s and Fitch’s AAA, to this day).

Does it Matter?

The country’s new rating of AA+ from Fitch puts the U.S. in line with the likes of Austria and Finland but below seven nations, including: Australia, Denmark, Germany, Luxembourg, the Netherlands, Norway, Singapore, and Switzerland. There are also two AAA-rated companies, Microsoft (NASDAQ: MSFT) and Johnson and Johnson (NYSE: JNJ), following the downgrade of ExxonMobil (XOM) back in 2016 (the first time since 1949) as oil prices plummeted. This compares to 60 companies that bore the AAA rating back in the early 1990s.

Unlike the debt ceiling standoff, the rating change by Fitch does not appear to have rattled markets. The Dow Jones Industrial Average, S&P 500 and Nasdaq-100 have each rallied since the announcement, and prominent financial figures have cast doubt on the relevance of the news.

In a recent interview with CNBC, JP Morgan (NYSE: JPM) Chairman and CEO Jamie Dimon labelled the move “mostly irrelevant”, stating that the market, rather than the major credit rating agencies, are responsible for determining borrowing costs (implying that the cost of debt is set by supply and demand, and the perception of buyers). He also suggested it is “ridiculous” that other countries hold higher credit ratings than the United States when they depend on the stability created by the U.S. (arguably they also have less diverse and innovative economies).

US Treasury Secretary Janet Yellen responded to the downgrade by calling it “arbitrary” and outdated, noting:

“Fitch’s decision does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong.”

The move does not appear to have influenced the world’s most famous investor either. Just days after Fitch’s downgrade was announced, it was revealed that Berkshire Hathaway’s (NYSE: BRK.B) cash and investments in short-term Treasuries had surged to US$147 billion at the end of the second quarter, representing a near all-time high for the conglomerate. Chairman and CEO Warren Buffett told CNBC that Fitch’s decision would not alter his investment strategy and he was not concerned about the U.S. Dollar nor the Treasury market–which is particularly notable given Berkshire’s significant investment in Moody’s.

“Berkshire bought $US10 billion in US Treasuries last Monday..he said we bought $US10 billion in Treasuries this Monday…and the only question for next Monday is whether we will buy $US10 billion in three-month or six-month bills,” he said.

Next Hurdle

While the downgrade by Fitch took investors by surprise and generated a lot of headlines, it does not appear to have had a material impact on markets–which at the moment, remain far more concerned about jobs, inflation and interest rates data. When questioned, the Biden administration declined to speculate on whether other major credit rating agencies would follow Fitch’s lead, but noted that Fitch had been the only agency with the US on a negative watch (all 3 major rating agencies now maintain a “stable” outlook).

Undoubtedly, however, the issue may arise again at the next round of debt ceiling negotiations or if the country experiences an increasingly greater debt burden or further political instability. Additionally, should the United States wish to reclaim its top-tier rating once again, it would likely require a permanent suspension of the debt ceiling–something that prominent figures have been advocating for since the initial 2011 saga. Dimon expressed such a view in his CNBC interview, stating: “We should get rid of the debt ceiling…It’s used by both parties in ways that sow uncertainty for markets.”

Two ASX Small Caps With Positive Market Updates

by mktogether-blogs | Aug 9, 2023 | Uncategorized

Two ASX Small Caps With Positive Market Updates

10/8/2023

The financial world often stands still, watching behemoths like Apple Inc (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) manoeuvre. Given their gargantuan size, these market titans inevitably cast wide ripples across the broader investment landscape with every price fluctuation – particularly during reporting season. Yet, beyond the limelight and the vast echo of these large caps, there’s a realm of potential in the business performance of small caps where valuations remain grounded.

Join us a little closer to home as we take a look at two holdings within the TAMIM portfolio that have recently provided positive updates to the market prior to earnings season kicking off.

Helloworld Travel Ltd (ASX: HLO)

Helloworld Travel has continued its post-pandemic resurgence as travel demand continues to defy rising interest rates and inflation. Loyal shareholders have been rewarded with the Company’s year-to-date performance up over 100%.

Helloworld is a leading Australian & New Zealand travel distribution company, comprising retail leisure travel and business travel networks, travel broker networks, destination management services (inbound), air ticket consolidation, tourism transport operations, wholesale travel services, online operations and event-based freight operations.

At the beginning of August Helloworld announced it would be increasing its FY23 guidance.

The company has revised its guidance, projecting underlying operating earnings (EBITDA, earnings before interest, taxes, depreciation, and amortization) of $42 million to $45 million, a significant improvement from the previous year’s loss of $10.6 million and the third upgrade having previously guided underlying EBITDA of $28 million to $32 million and $38 million to $42 million.

Total Transaction Value (TTV) is expected to surpass $2.56 billion, representing a substantial 138% increase compared to the previous year.

The Company highlighted its cost management efforts in improving EBITDA to revenue margin outcomes, and all geographic segments are now running profitably. Furthermore the acquisition of Express Travel Group (ETG) has been unanimously approved and is expected to contribute an additional underlying EBITDA of $11 million to $12 million in the FY24 year.

Looking forward, Helloworld believes it is in a strong liquidity position with no external borrowings after funding the ETG acquisition via its cash reserves. The company is confident in the outlook for leisure travel demand in both Australia and New Zealand, and continued improvements from Western markets. Further growth is expected in traditional Asian markets in 2024.

Volpara Health Technologies Ltd (ASX: VHT)

Volpara Health is in the business of medical technology and provides breast imaging analytical products to improve the decision making and early detection of breast cancer.

The company has seen its share price rise over the past month following a number of positive market updates.

In early July, Volpara provided a business update with two significant announcements:

Reduction of revolving credit facility

After experiencing three successive quarters of strong cash flows and implementing a revised strategy, Volpara has moved to reduce its revolving credit facility from NZ$10M to NZ$2.5M. The company has been operating on an approximately free cash flow break-even basis, and with NZ$12M of cash on hand at the end of Q1FY24, they no longer consider the larger credit facility necessary. This decision will result in cost savings of NZ$112,500 per annum.

Microsoft Healthcare & Life Sciences Partner of the Year Award:

Volpara has been recognised by Microsoft (NASDAQ: MSFT) and awarded the global Healthcare & Life Sciences Partner of the Year Award for 2023. This prestigious award acknowledges Volpara’s excellence in providing innovative healthcare and life sciences solutions based on Microsoft cloud technologies. Microsoft has been supporting Volpara in providing AI solutions for breast cancer detection and prevention.

Furthermore, Volpara released its Q1 FY24 Quarterly Cash Flow Report revealing strong cash receipts and positive operating cash flow.

The highlights for the quarter included:

The third straight net operating cash flow positive quarter, albeit just, with NZ$9K net inflow compared to NZ$2.8M net outflow in Q1FY23.
The Company has been net operating cash flow positive since September 2022, with approximately NZ$2.4M.
Record Q1 cash receipts from customers amounted to NZ$11.0M+, a growth of over 27% compared to NZ$8.6M in Q1FY23 (21% in constant currency).
Volpara is ahead of guidance and on track to achieve net operating cash flow positivity for the full year in FY24, a full year ahead of expectations.
Contracted Annual Recurring Revenue (CARR) increased to approximately US$27.2M (~NZ$44.1M), up US$700K from the previous quarter.
Annual Recurring Revenue (ARR) reached approximately US$21.5M (~NZ$34.9M), up from US$20.9M in the previous quarter.

With cash flow positivity in sight, perhaps Volpara is at an inflection point and if the company can maintain strong gross margins and continue to improve the conversion of revenue into free cash flow shareholders could be in for a great ride.

Both Helloworld Travel and Volpara Health Technologies have delivered positive market updates, showcasing their resilience and growth potential. Helloworld’s post-pandemic resurgence has been impressive, rewarding loyal shareholders with a remarkable performance, while Volpara’s share price improvement reflects its successful business updates. With both companies poised for continued growth and market leadership, investors can be excited by the potential opportunities ahead.

Disclaimer: Helloworld Travel Ltd (ASX: HLO) and Volpara Health Technologies Ltd (ASX: VHT) are held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.

ASX Reporting Season: When to Sell Your Stocks and Why

by mktogether-blogs | Aug 7, 2023 | Market Insight, Reporting Season

With the end-of-financial-year reporting season upon us, it’s often good to have a game plan going for when each of the companies you own publishes their full-year financial results. In particular, research has shown that investors often struggle with deciding whether to sell an individual investment. This is often psychological, for example, because they don’t want to sell at a loss, or for fear the stock price will rise after the investment has been sold.

While we encourage long-term investing, there are several important reasons why it may be time to part ways with one or more of your investments. Here are five of the most important ones to keep in mind this reporting season.

1) Weakening fundamentals

Strong business fundamentals are crucial to successful long-term investing. While investor sentiment and emotion can fuel a share price rally in the short term, it is the quality of the underlying business (usually the growth in profits or earnings per share) that drives long-term market-beating returns.

Therefore, it’s important to monitor the fundamentals and check on the health of the underlying business. Are they selling more products? Are they raising prices? Is it still the most popular brand or the best service in the industry?

A good way to do this is to develop a checklist that you can run through when the company reports its financial results. This also helps ensure an investment is being sold for the right reasons and not driven by consensus thinking (your opinion about the results might not be the same as the consensus, after all).

Some important criteria may be checking a company’s debt levels, profit margins, or revenue growth. Which metrics are most relevant will depend on the individual company, including its stage in the corporate life cycle. For example, revenue growth is likely to be more important for early stage businesses that are gaining scale, while market share, cash generation and returns to shareholders (dividends and share buybacks) may be more relevant to mature businesses.

Other factors that may be important include the competitive dynamics in the industry or management’s strategy. If a company’s management has changed tack and is more aggressively pursuing acquisitions, increasing debt or branching out into new product lines, it might be time to reassess your holding.

We recommend you develop a checklist before you look at company results to stay objective (just like it’s a good idea to research a company before looking at the share price!).

2) Investment thesis is broken

Investors typically have a thesis, or reason for choosing a particular company to include in their portfolio. This represents their view of how they expect the future to pan out (in favour of their investment, of course). For growth-oriented investors, this will likely centre around a company gaining market share within a particular sector, or an industry having strong secular growth trends (such as cloud computing or artificial intelligence). For value oriented investors, this will be a view on a particular company’s stock price being underappreciated by the market relative to its earnings potential. Broadly speaking, growth investors typically expect the world to change, while value investors are betting that it’s likely to stay more or less the same.

The world is an uncertain place though, and things do not always work out as planned (a great investor usually has a strike rate of 6 out of 10 successful investments). As Warren Buffett once said “the most important thing to do if you find yourself in a hole is stop digging.” When things aren’t going as planned, investors should be open to the possibility they could be wrong, and be willing to part with their investment when their thesis does not play out.

3) To buy something better

One of the most difficult but compelling reasons to sell an investment is when a better opportunity presents itself. Within their own framework (risk tolerance, time horizon etc), investors should aim to hold a portfolio of their very best ideas at any given time. Investing it can be argued, is a relative game after all, not an absolute one. If one investment is forecast to generate a return of 50% over the next 3 years and another is estimated to return 75%, then it makes rational sense to switch (all else being equal).

During reporting season, investors may spend their time reviewing not only their current investments but also potential investments on a watchlist. If a watchlist company performs beyond expectation (or there is a dramatic change in the share price of the two investments), it may be time to switch things up.While selling a good investment to buy a great investment sounds perfectly logical in theory, there are a number of psychological barriers to doing this in practice. Investors can suffer from several psychological biases that can hamper their portfolio management, including being more attached to investments they already own rather than ones they are yet to own.

4) To maintain diversification

As we’ve outlined before, diversification is a key tool for managing risk (but can also be overdone). When a company performs well and its share price outperforms other stocks in a portfolio, that position size will grow in size.

For example, the US technology sector (and in particular the mega-cap stocks) has had an especially strong run for the year to date. Investors holding these companies have been rewarded with strong returns, and their position sizes have likely grown over the course of the year. This can be a great time to reduce risk, realise some profits, and possibly to make a new investment that you’ve been waiting for.If it turns out that momentum was driving up the stock price, or the company runs into some challenges later on, an investor will be greatly relieved to have lightened that particular position.

Unfortunately for investors trying to maintain some diversification, though, it’s often the winners that keep delivering for a portfolio, and selling them too early can turn out to cause great regret. Many famous investors regret their errors of “omission” (ones they missed out on) far more than errors of “commission” (ones they included but performed poorly). Famous Canadian investor Francois Rochon discusses such a predicament regularly in his annual client letters.

5) When a stock is overvalued

Changes in company valuation can be another key reason to reduce or sell a position–but is one of the most difficult. It’s important for investors to recognise the difference between price and value, and to have a fundamental value in mind for each of the investments they own–by assessing the company’s long-term cash flow generation and by comparing it to similar businesses or the company’s historical valuation metrics. One of the truly tricky parts though is assessing how the business may have changed over time (has its market position improved or deteriorated, for example) and how this may have changed the fundamental or intrinsic value.

Don’t be afraid to sell

Deciding to sell an investment can be a difficult one. Investors are often criticised for being too short-term orientated and they may try to overcompensate by giving a company or management team too much leniency. It’s also challenging to part ways with a company that you’ve done extensive research in and has possibly made you a considerable amount of money.

It’s generally not advisable to sell a stock just because its price has increased or decreased, but there are many compelling reasons for pulling the trigger and letting a company go from your portfolio. While not an exhaustive list, weakening fundamentals, a broken investment thesis, superior returns elsewhere, adequate diversification, and extreme overvaluation are great places to start. As you navigate through this earnings season, keep these in mind.

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Next Entries »

Technology Eats the World: Global Mobility Accelerates

Technology Eats the World: Global Mobility Accelerates

Tesla: The Power of Compounding

NVIDIA: The World’s AI Engine

Uber: Leader in Mobility

Global, China Sales Accelerate

Infrastructure Investment Soars

Regulation Bolsters EV Adoption

The TAMIM Takeaway

Viva Leisure’s share price lifts on strong 2023 results

Viva Leisure’s share price lifts on strong 2023 results

The Big Wins

Financial

Outlook

U.S. Credit Rating Downgraded by Fitch

U.S. Credit Rating Downgraded by Fitch

Fitch Follows S&P’s Lead

Does it Matter?

Next Hurdle

Two ASX Small Caps With Positive Market Updates

Two ASX Small Caps With Positive Market Updates

Helloworld Travel Ltd (ASX: HLO)

Volpara Health Technologies Ltd (ASX: VHT)

ASX Reporting Season: When to Sell Your Stocks and Why

1) Weakening fundamentals

2) Investment thesis is broken

3) To buy something better

4) To maintain diversification

5) When a stock is overvalued

Don’t be afraid to sell

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