Small Cap Investing: How Big Volatility Can Mean Big Opportunity – Fat Tail Daily
Sometimes a stock can take a big dive on the stock market…only to be bought back up. Today you’ll discover why keeping an eye on heavily sold-down stocks can be crucial for savvy investors.
Today, Fat Tail Daily will visit the scene of the car crash, the train wreck and the blast zone.
Yep, we’re talking stocks that bomb out on the day and where investors get left holding a busted flush…at least in the short term.
The share market can be a treacherous place. There’s no better example right now than Web Travel Group [ASX:WEB].
It slumped a savage 35% after downgrading its margin and expected earnings yesterday.
This company was only just demerged out of Webjet last month, and it’s already hit trouble.
What’s baffling is that Web Travel Group was supposed to be the ‘hot’ part of the business with the big growth prospects. So much for that!
We can consider this a classic example of big expectations disappointing.
Hell hath no fury like an investor scorned.
However, keep an eye on it from here.
Why?
There have been some big sell daily sell downs over the past 12 months…only for the stocks to recover over time.
Elders [ASX:ELD] is one example from earlier in the year…
Bapcor [ASX:BAP] was another one…
And Steadfast [ASX:SDF]…
Of course, for every stock that comes back there are probably three or four that keep sliding. But the price action following one of these big drops can be instructive.
With WEB in mind, it’s not as if travel as an industry is going away anytime soon.
I wouldn’t be surprised for that one to find support from fund managers with a longer-term outlook. As I suggest, see how it trades over the next few days.
Another one with this playbook in mind that you might be interested in is the gaming company Light & Wonder [ASX:LNW].
You can see on the chart that it took a big hit on September 24…
However, note the previous uptrend in the stock. This was coasting along into all-time highs before the big whack.
What happened to cause the sell-off?
LNW lost a lawsuit where a competitor alleged they infringed on some existing copyright. That means they must cease selling the game under dispute.
However, the company later noted that the game in question was only responsible for about 5% of income, and they reaffirmed their full-year guidance anyway.
LNW is also appealing the recent court ruling as well, but even if they lose, they still have a diverse portfolio of options to sell and develop.
If you take a 12–24-month view, the likely result is this short-term whack will be forgotten, and the share market will move on.
I can tell you one thing…
Light & Wonder [ASX:LNW] is highly favoured among a lot of fund managers. It often appears in their top ideas. Gambling is a very resilient industry — regardless of the state of the economy.
That’s not to say the market is always right…but it’s the portfolio managers that allocate capital. Money talks.
If they like it long-term, they’ll buy it back up. Watch it. They look like they might be doing it already.
What about another busted flush?
This hasn’t sold down on the day…it’s been sliding for years, in one way or another.
It’s gambling company Tabcorp [ASX:TAH]. This is down 60% since June last year.
However, note what’s going on. New CEO Gillon McLachlan is now in charge — and has already put a $1.3 billion impairment charge through the accounts.
In other words, the dirty laundry is getting taken care of now while he works out how to take the business forward.
It’s no easy task. It’s a competitive industry, and Tabcorp has lost ground to its pure-play digital rivals over the last ten years. It’s also at a regulatory disadvantage in NSW.
Here’s the thing, though…
At some point, all of the bad news will be out about Tabcorp — and built into the price.
It still has a strong brand and beachhead in the market. It all spins now on how the new CEO takes the business forward.
I don’t know if he’ll be successful…there’s no public plan in place. But I’m watching with interest. I suggest you do the same.
Best,
 |
Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator
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All advice is general advice and has not taken into account your personal circumstances.
Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.
Callum Newman is a real student of the markets. He’s been studying, writing about, and investing for more than 15 years. Between 2014 and 2016, he was mentored by the preeminent economist and author Phillip J Anderson. In 2015, he created The Newman Show Podcast, tapping into his network of contacts, including investing legend Jim Rogers, plus best-selling authors Jim Rickards, George Friedman, and Richard Maybury. He also launched Money Morning Trader, the popular service profiling the hottest stocks on the ASX each trading day.
Today, he helms the ultra-fast-paced stock trading service Small-Cap Systems and small-cap advisory Australian Small-Cap Investigator.
