What we do when one of our largest holdings falls 13.5% upon releasing earnings

Wabash

Don’t panic! It is understandable to be disappointed, but irrational to act without any analysis.

On many occasions, like a few days ago, we fail to make sense of market behaviour. However we do not blindly suggest the market is wrong. Mostly, we accept the vagaries of the market because we have no basis to dispute it. And we accept that, ultimately, the market is right. The challenge for investors is to correctly identify amongst the plethora of “non-sensical” market moves those which are merely overreactions or short term aberrations. The further challenge is then to have the confidence to maintain conviction in the face of conflicting market feedback. We see investing as a delicate balance between arrogance and humility.

With regard to Wabash National Corporation, we read the quarterly earnings release and listened to the conference call transcript. We came to the conclusion that the sell-off did not appear rational. The quantifiable points were:

  • total shipments were expected to come in at the lower end of the previously expected range; and
  • earnings per share guidance range was narrowed from $1.80-$1.90 to $1.81-$1.86.

So, based on the mid-point of those ranges (and applying the stock price before its 13.5% plunge) the 2016 earnings yield decreased from 13.8% to 13.7%. Does this justify the market reaction? Of more interest to us was that, as a consequence of the sharp decline in share price, the FY16 earnings yield had risen from 13.8% to 16.1%.

Isn’t this the bigger deal?

So why the sell-off? Perhaps the “market” was expecting management to increase guidance? Who actually knows what investor’s expectations were going into the result? Or, were investors concerned upon hearing the discussion around potential acquisitions (diworsification)?

Upon reviewing the release we were unable to ascertain why the stock price fell so sharply. We accept that we cannot always know. And we believe that there is no value in us spending further time trying to know.

Rather, our process dictates our actions. After the numbers were updated, the financial distress and quality indicators continued to look as attractive as previously. With “Mr Market” placing the business on sale, we felt that acquiring more of it made complete sense. Accordingly, we topped up our holdings.

Stay cool,
Stuart and Alexis

This article has been prepared solely for the purpose of providing general information about Alluvium Asset Management Pty Ltd (ABN 69 143 914 930) which holds an Australian Financial Services Licence Number 476067 (“Alluvium”), and the Alluvium Global Fund, which is managed by Alluvium. The article has been compiled in good faith in relation to the activities of Alluvium. Alluvium believes the statements contained are reliable, however no representation is made as to the completeness or accuracy of the information it contains. In particular, you should be aware that this information may be incomplete, may contain errors or may have become out of date. Use of this article is entirely at your sole risk. Reproduction or distribution of this article without written permission is prohibited. The information is general in nature and does not take into account your personal circumstances, financial needs or objectives. Statements contained are not general advice or personal advice and should not be considered as a recommendation in relation to an investment in the Fund or any company referred to, or that an investment in the Fund or any company named in the article is a suitable investment for any specific person. Further, it is likely that at the time this article is published, Alluvium’s and/or the Fund’s position or opinion in any identified company may well be different to that at the time of writing. You should seek independent financial advice and read the relevant disclosure document prior to acquiring a financial product. Alluvium, its directors and employees do not accept any liability for the results of any actions taken or not taken on the basis of information contained in this article, or for any negligent misstatements, errors or omissions.

By | 2017-05-25T12:46:15+00:00 November 2016|Portfolio Activity|0 Comments

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