When should you sell a stock?
You can get an in-depth look at the topic in this article, where I wrote that 'if you bought a stock expecting its price to rise as a result of good performance and the performance does not eventuate, re-assess whether it has a place in your portfolio.'
With Origin Energy Ltd (ASX: ORG) and Sims Metal Management Ltd (ASX: SGM) both down more than 50% in the past five years, many shareholders are surely wondering if it's time to cut and run.
That's a tough question to answer, especially, since both Origin and Sims look to be making headway at turning around their fortunes:
Sims Metal Management Ltd
Sims has committed to improving its Earnings Before Interest and Tax (EBIT) by 350% in the next four years without relying on 'external cyclical recovery or acquisitions'. It's an ambitious goal that the company has already made some headways towards, with a 17% lift in 'underlying EBIT' in financial year 2015.
Despite this, shares have slipped from over $10 earlier this year to prices of $7.17 at the time of writing. Investors appear to have twigged that there could be worse to come, with commodity prices still unwinding throughout most of this year.
I must also sound a note of caution about Sim's determination to grow EBIT, which Warren Buffett's partner Charlie Munger famously referred to as 'bull**** earnings' because all companies have to pay interest and tax.
Additionally, Sims is earning a Return On Invested Capital (ROIC) of roughly 5.5%, which is quite low and unlikely to deliver outsized returns, even at today's lower prices. I would consider selling Sims today.
Origin Energy Ltd
The situation is slightly different at Origin, which recently conducted a discounted capital raising and slashed its dividend in order to shore up its balance sheet and reassure shareholders in the lead-up to the launch of its APLNG plant.
Once the plant commences operations it is expected to deliver decent cash flows to Origin and should act to shore up the balance sheet if oil and gas prices stay low, which seems likely. Importantly, the downside to Origin shareholders from here looks fairly limited, despite continued headwinds in its domestic electricity business.
However, there is a decent amount of upside available if the APLNG project turns out to be better than expected – and once investors get over the nasty shock of the recent discounted capital raising. If I was a shareholder, I would aim to hold my Origin shares for the time being.
