It's reporting season! For me, reporting season is like Christmas. We get insights into all of these different businesses and they give us a glimpse into how the economy is going.
But what happens if your shares report badly? Should you sell them? It depends.
Reporting season is a funny time. It's not necessarily about the numbers themselves, it's about how the company performs against expectations. That's how share prices are decided by investors during the year, share prices are based expectations for the future. They don't all start at $1 just before the report.
A business could report 20% profit growth but the share price could fall if 25% profit growth was expected, whereas a business could report 5% profit growth and see its share price rise if profit was expected to be flat. You can see these types of different reactions with shares like Altium Limited (ASX: ALU) and Nick Scali Limited (ASX: NCK).
A business that grows profit by 20% is clearly not doing badly, it was just that the share price had gotten too far ahead of itself. Although there's also the possibility that management had provided guidance but then underperformed that guidance.
I think there are only a few main reasons why you'd sell your shares for investment reasons:
The thesis is broken – Presumably you invested in your shares for a reason, a projection or whatever reason. If a report seems to show that your investment thesis is broken, or will break soon, then it could be wise to move on.
There is a much better investment opportunity – Not every share is priced correctly. Sometimes it's possible to find great opportunities, but you may not have the free cash to invest in it. You could sell one of your investments to buy another, but only if you're sure and you have also considered tax and brokerage costs.
It has become too expensive – Each business has an intrinsic value. You might say that under a range of scenarios for the future, a business you own is worth between $20 to $25 per share today. If it's trading on the ASX at a share price of $40 it could be worth taking some profit off the table.
Foolish takeaway
Buying shares is much easier than selling shares. When we decide to sell shares when they fall it quite often turns out to be the wrong choice – share prices can go back up if the market was too negative in early reaction. In hindsight I made a mistake of selling Challenger Ltd (ASX: CGF) shares a few months ago.
