It would be nice to write about a different topic!
Once again, we avoid the instinctive “Type 1 – fight or flight”1 response and we choose not to panic.
American Public Education, Inc. released its results and conference call transcript prior to market open. We reviewed them and they (subjectively) did not appear reassuring. However our investment process seeks to only hold businesses when (objectively) reasonably cheap, so we expect “bad news” to already be somewhat factored into the price. Well on first impressions we were wrong in this case – as the share price fell 26%.
Once again we cannot make sense of the market’s reaction. It seems that one or more shareholders took the view they just had to exit the stock without regard to price. And the fact that it is a small company (market capitalisation of around USD300m) with relatively low levels of liquidity appears to have exacerbated the price decline. The question is whether this is rational.
We started composing this blog the day the shares plunged. When we completed this synopsis (three trading days later) the share price had rebounded by more than 50% to a price materially higher than prior to the release of its results. Some of that recovery may be attributed to the “Trump” effect (two other companies in the same field were up around 20% over those two days – we’ll take any luck if we can get it!). However, we suspect the vast majority of the extraordinary rebound was due to other investors simply recognising an over-reaction to a less than ideal set of quarterly results and business update.
The selling on that day could not possibly been based on a complete analysis of the results as not all up to date financial information was provided (for example, the updated balance sheet was not available). So, whilst we knew at the time that these results may well cause us to revisit the position, our trade decisions are always based on our investment process, checklists, and rules and these require full and current financial information.
This experience once again serves to test our emotional resolve and illustrates how our investment process is designed to operate in the context of “Mr Market’s” more depressed days.
1 The fight-or-flight response (also called hyperarousal, or the acute stress response) is a physiological reaction that occurs in response to a perceived harmful event, attack, or threat to survival.” Bodily changes in pain, hunger, fear, and rage. Walter Bradford Cannon (1929). Wikipedia.