When to catch a falling dagger share?

Falling dagger shares can be dangerous, but sometimes you must be brave.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The share market can be a very odd and fickle beast to deal with. Some businesses can report increasing profits but see their share prices fall.

A 'falling dagger' is basically describing a share that just keeps falling and falling.

Falling daggers can be very dangerous because if you base your investment decision purely on share price movements then you might be missing that the underlying business has deteriorated as well.

Vocus Group Limited (ASX: VOC) and Select Harvests Limited (ASX: SHV) are two good examples of where both the business performance and the share price has been poor over the last couple of years.

However, if you're able to pick up some shares of a business whose share price has temporarily dropped but the underlying business is continuing to grow, then that could be a perfect time to buy.

If you look back over the past year, there have been opportunities to buy quality shares like REA Group Limited (ASX: REA), Ramsay Health Care Limited (ASX: RHC) and Greencross Limited (ASX: GXL) where the share prices have fallen by 20% or more.

REA Group and Ramsay are both very high-quality businesses with clear growth plans and increasing profit margins. I think any opportunity to buy growing businesses at a discounted price should be welcomed by investors, not feared.

It can be a much riskier game trying to decide when a deteriorating business is good value compared to a growing business.

If you go for the deteriorating business then you may be heading towards the investing style of a young Warren Buffett. He compared this type of investing to a mostly smoked and discarded cigar by saying "Though the stub might be ugly and soggy, the puff would be free". You will only get one last puff on that business if it's not a turnaround story.

Foolish takeaway

Although Ramsay and REA Group are nowhere near as cheap as they have been in recent times, they both should be market-beaters over the coming years thanks to their ability to grow revenue and earnings at a good rate.

Motley Fool contributor Tristan Harrison owns shares of Greencross Limited, Ramsay Health Care Limited, and Select Harvests Limited. The Motley Fool Australia owns shares of Greencross Limited and Vocus Communications Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »