The Art of Turning a Losing Stock into a Winning Bet

Have you ever experienced that sinking feeling of watching a stock you invested in plummet? It can be discouraging, and you may wonder if there is any hope for redemption. But what if I told you that sometimes, the comeback story can be just as rewarding as the initial success? Today, we will dive into the intriguing topic of…

Rebuying a losing stock.

Sometimes you do everything right in the investment world and still get burned. You analysed all the competitors in the industry, you crunched the company’s numbers, and you felt you were paying a fair price for the stock… Yet the price still fell. You hit a stop loss. Or simply decide that the losses are too high.  As a result, you were knocked out of your position before your investment could really take off.

The key here is to avoid is trying to “catch a falling knife.” As a stock falls, it does get cheaper, but timing bottoms in asset prices is the hardest way to invest. You’ll do better by waiting for an upward trend to form and riding that momentum.

A good example of this losing stock scenario was Insimbi

It rose from 99c in December 2022 to 140c in June 2023. I called a sell on the stock as it dropped down to 98c in October 2023, hitting a low of 90c on 7 November 2023. So is this a stock worth getting back into – or do you remain on the sidelines? Well, let’s look at the rules I’d use to look at this situation:

Rule #1 – Wait three to six months

The worst outcome when rebuying a stock is to just see it fall further. You don’t want to buy a stock back, and see it fall more. That’s why I prefer waiting for three to six months following an exit from a stock. The time gives some perspective to re-evaluate the analysis and conclusions I’d made on the stock. It can also be enough time for new financial information to come to light. Sure – you might miss a buying opportunity. But on balance this simple rule will serve you well.

Rule #2 – Wait for positive momentum

There’s ample evidence that companies with upward rising share prices, will continue the momentum, or at least continue outperforming falling shares. Use momentum to your advantage. Once a stock’s fall reverses into a rising trend again you can consider re-buying it.

There are three momentum indicators you could use:

1. A positive 3, 6 or 12 month price change

2. The stock price is above its 200-day moving average

3. The stock’s 50-day moving average crosses above its 200-day moving average

Sure – you might miss out on some of the gains if you only act once an uptrend is established – but it is a clearer indicator of future gains.

Alternatively you can also consider news flow or positive catalysts for a business. A gold producer that would be greatly benefited with a steeply rising gold price, or a pharmaceutical company that just released news of a ground breaking new drug that’s been in the approval phase for years.

Rule #3 – Re-examine the fundamentals

The final step is to look at the business case for the stock again.

The best time to re-enter a stock is when it has proven it can sustain the growth you have come to expect. And of course, you want to make sure the stock still trades for a fair valuation. You can use a simple price-to-earnings or price-to-sales ratio to determine this.

In an ideal world, we’d end up getting a business with better growth and better prospects for the same valuation we previously paid. We don’t recommend you try to re-enter every stock you got wrong. You should only consider this for your highest-conviction ideas.

So – to come back to my Insimbi example:

The stock is trading below where it was when we sold it, all of its ‘momentum’ indicators currently show its momentum is not towards the upside at present. Fundamentally the stock is cheap. The company trades on a dividend yield of 7.89% and a PE ratio of only 3.57. That said, in its latest financial results the stock saw a modest decline in revenue as the SA economy tightened up and the price of metals it recycles dropped.

Simply put – the company needs the price of copper to rise, and if this happens, it could see a big improvement in revenue and profits. This would both trigger growth and a turning point in its momentum. For now – it is a stock I’d keep on my watchlist. But we first need a couple of months before thinking about re-buying it. If you’d like to know what I’m investing in right now then learn more about my service here.