Author: therawinformant

Market optimism may be on the rise, but short-sellers have been increasing their bearish bets on these three ASX stocks.

Short-sellers are traders who borrow stock to sell on market with the aim of buying it back later at a lower price to profit from the difference.

While the S&P/ASX 200 Index (Index:^AXJO) closed at a seven-month high on Tuesday, short-sellers believe some ASX stocks are poised to fall.

It pays to keep an eye on what this group of traders are doing as they tend to be more sophisticated than the average punter.

Short-sellers invading this Galaxy

The stock that has seen the biggest increase in short bets over the past month is the Galaxy Resources Limited (ASX: GXY) share price.

The latest ASIC data to 7 October (the data is always a week behind) showed 285 basis point increase in short interest over period. The total percentage of Galaxy’s shares that have been short sold stands at 9.13%.

This is probably due to Tesla Inc (NASDAQ: TSLA) Battery Day event three weeks ago. This was where its founder Elon Musk outlined plans to use less lithium and more recycled inputs to build the next generation of batteries for its electric vehicles.

The news couldn’t have come at a worst time as the lithium market is already oversupplied.

Acquisition risks catching the eye of short-sellers

The second most attacked stock is the Uniti Group Ltd (ASX: UWL) share price. Short interest in the telecom services group surged 247 basis points – taking the total percentage of its shares being shorted to 4.77%.

Short-sellers are probably targeting the stock as it goes into a bidding war for OptiComm Ltd (ASX: OPC).

Uniti put an initial bid in to acquire the network provider but First State Super made a counteroffer for OptiComm.

History shows M&A creates value for shareholders in the target and destroys value for the acquirer. A bidding war only increases the probability that Uniti will overpay.

Drug development setback

Finally, the Mesoblast limited (ASX: MSB) share price experienced the third largest increase in shorts for the month in question. The level of shorts jumped 241 basis points to just over 8% of the total MSB shares on issue.

Short-sellers are increasing their bets against the stock as the biotech suffered a setback with the US Food and Drugs Administration (FDA).

The news was a shock to the market as investors were expecting smooth sailing its remestemcel-L drug, but the FDA asked it to undertake another randomise test.

More reading

• ASX 200 jumps more than 1%, big ASX banks rise
• Top brokers are urging you to buy these ASX stocks today
• 3 ASX 200 growth shares to buy today
• The Unibail (ASX:URW) share price is climbing today. Here’s why.
• Zip and Estrella Resources were among the most traded shares on the ASX last week

Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Scott Phillips.

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The Telstra Corporation Ltd (ASX: TLS) share price has had a fantastic day today, soaring 4.32% to $2.90 per share by market close. It’s a welcome turnaround for Telstra shareholders. They have had to watch the telco’s share price drift lower and lower over the past two months, culminating in a new 52-week low of $2.76 that was hit just last week. But even after today’s decisive move, the Telstra share price remains a long way from its 52-week high of $3.94. So why are Telstra shares jumping today? And more importantly, is the telco a buy right now?

Why the Telstra share price surged today

Well, in my view, we can comfortably assume it was all because of the annual general meeting (AGM) notes Telstra released to the market today. The company held its AGM this morning and provided investors with some much-needed certainty around its cherished dividend. 

Telstra is a favourite of ASX dividend investors due to its steady cash flow and relatively high annual payouts. Its 2020 dividends amount to 16 cents per share (cps). That, on current prices, gives Telstra a trailing dividend yield of 5.52% – or 7.89% grossed-up with Telstra’s full franking credits.

In Telstra’s earnings report for the 2020 financial year that was released in August, the company appeared to cast doubt over whether the 16cps payout would be maintained in FY2021. That’s because Telstra has a ‘payout ratio’ policy of aiming to pay out between 70% to 90% of its earnings every year as dividends. In the FY20 earnings report, Telstra forecast that its FY2021 earnings would be insufficient to cover a 16cps dividend. This led investors to sell off Telstra shares ever since in the belief the company would deliver a dividend cut next year.

Dividend back on the table

However, in its AGM notes, Telstra appeared to backtrack on this position. Here’s some of what Telstra Chair, John Mullen, had to say this morning on the topic:

The board clearly understands the importance of the dividend and if necessary is prepared to temporarily exceed our capital management framework principle of paying an ordinary dividend of 70-90% of underlying earnings to maintain a 16c dividend.

In short, this is good news for dividend investors, and why I believe the Telstra share price pushed higher today.

Are Telstra shares a buy today?

I think this position taken by Telstra’s management is extremely good news for Telstra shareholders. In my opinion, it means that dividend investors should reconsider Telstra today. Telstra is still going through some painful restructuring, which has, in large part, been caused by the ongoing NBN rollout.

However, I think the company’s next-generation 5G plans are very exciting. 5G should open up some lucrative growth avenues over the next decade. In the meantime, Telstra’s defensive earnings base should be able to cover a 16cps dividend well into the future. Especially considering what the company has said today. Thus, if a near 8% grossed-up dividend is important for your investing goals, I think Telstra is indeed a solid buy today.

More reading

• ASX 200 jumps more than 1%, big ASX banks rise
• ASX 200 up 0.9%: Telstra dividend update, Afterpay & Xero hit record highs
• Why Afterpay, HUB24, NEXTDC, & Telstra shares are storming higher
• Telstra (ASX:TLS) share price in focus after AGM dividend update
• Telstra share price and 1 other ASX telecom trading near all time lows

Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra 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 Scott Phillips.

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The iSelect Ltd (ASX: ISU) share price had a few ups and downs today, climbing to 35 cents in afternoon trade before dropping to its opening price of 34 cents. This comes after the company announced a trading update this morning and advised on the appointment of a new permanent CEO.

After a turbulent year, October comes as a welcome reprieve for shareholders, with the iSelect share price up 7% so far this month. Like most ASX shares, iSelect was pummelled by the COVID-19 market panic.

The iSelect share price fell 37% from 21 February through to 23 March and has regained 41% since that low, leaving shares down just 6% year-to-date. That closely mirrors the performance of the All Ordinaries Index (ASX: XAO), also down 6% since 2 January.

What does iSelect do?

Based in Melbourne, iSelect’s services offer Australians the ability to compare and purchase insurance, personal finance products and various utility subscriptions. The company also owns the comparison website, Energy Watch. The company’s stated goal is “to make Australians’ lives easier by saving them time, effort and money”.

Atop its Melbourne operations, iSelect has support offices in Fiji and Philippines. 

Why is the iSelect share price on the move?

This morning iSelect announced the appointment of a new permanent CEO, alongside providing a trading update.

Warren Hebard, the company’s current chief marketing & commercial officer, replaces Brodie Arnhold, who was appointed as interim CEO in April 2018.

iSelect chairman Christopher Knoblanche thanked Mr Arnold for “his hard work and commitment through what has been a challenging period for the company”. He added that the board “believes that the time is now right for Brodie to complete a handover to a permanent CEO”.

Warren Hebard said:

Having worked closely with the entire executive team on the development of the FY21 strategy, I am confident that the plan we have in place is the right one. Brodie hands over a business that is on track to deliver significantly improved profitability in FY21 and is well-placed to return to growth in FY22.

The company also reported that the changes it had made to its operating model in the fourth quarter of 2020 were “showing positive early signs for the business” in the current quarter.

iSelect posted first quarter FY21 earnings before interest, taxes, depreciation and amortisation EBITDA of $8.1 million, compared to $1.7 million in the same quarter last year. The company noted it had received $3.4 million in JobKeeper payments during the past quarter, but that this came to an end in October.

The company’s cash balance at 30 September was $12.5 million, up from $10.5 million on 30 June.

With a new permanent CEO and its Melbourne headquarters slowly emerging from lockdown, iSelect’s share price is one to keep an eye on.

More reading

• Why the Spirit (ASX:ST1) share price is shooting the lights out today
• The Azure Minerals (ASX:AZS) share price has rocketed 62%. Here’s why.
• Why the Mount Gibson (ASX:MGX) share price is moving higher today
• ASX 200 Weekly Wrap: Budget, US election sparks 5% surge in ASX shares
• Optiscan (ASX:OIL) share price flat on FDA update

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Scott Phillips.

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I believe the easiest way to create wealth is by investing regularly and with a long term view.

This is because by doing things this way, you can take advantage of the magical power of compound interest.

But which shares should you buy for strong potential long term returns?

Listed below are three hot ASX shares that younger investors might want to consider as buy and hold investments:

Afterpay Ltd (ASX: APT)

The first option is payments company Afterpay. Thanks to its international expansion and the increasing popularity of the buy now pay later payment method with consumers and retailers, Afterpay has been growing its underlying sales at a rapid rate over the last few years. The good news is that I feel confident the company still has a significant amount of growth left in its tank. Especially considering the size of the US market and its recent expansion into Canada and mainland Europe. There’s also the prospect of an entry into Asia in the near future. All in all, if everything goes to plan, I believe Afterpay could become a giant of the payments industry one day.

Kogan.com Ltd (ASX: KGN)

Another ASX share to consider buying is ecommerce company Kogan. While the pandemic hit many bricks and mortar retailers hard, it accelerated the shift to online websites like Kogan.com. This led to the company delivering incredible sales and profit growth during the second half of FY 2020. Pleasingly, the company’s strong form has continued in FY 2021, with both its sales and earnings more than doubling in August. In addition to this, it added 152,000 new customers to its platform during the month. This was a record monthly increase and took its total to 2,461,000. While its growth will inevitably moderate in 2021, I believe it is well-positioned to deliver above-average earnings growth throughout the 2020s.

Pushpay Holdings Ltd (ASX: PPH)

A final option is this donor management and community engagement provider. As with the others, it was a very strong performer in FY 2020 despite the pandemic. Over the 12 months, Pushpay reported a 42% increase in customer numbers to 10,896 and a 1,506% increase in operating earnings to US$25.1 million. This strong growth is expected to continue in FY 2021, with management expecting to more than double its operating earnings to between US$50 million and US$54 million. Pleasingly, this is still only scratching at the surface of its lucrative market opportunity.

More reading

• 3 reasons I don’t use stop-loss orders for ASX shares
• Why the Afterpay (ASX:APT) share price has hit a new record high
• Zip and Estrella Resources were among the most traded shares on the ASX last week
• ASX 200 up 0.9%: Telstra dividend update, Afterpay & Xero hit record highs
• Why Afterpay, HUB24, NEXTDC, & Telstra shares are storming higher

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd and PUSHPAY FPO NZX. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Kogan.com ltd and PUSHPAY FPO NZX. 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 Scott Phillips.

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The S&P/ASX 200 Index (ASX: XJO) went up by more than 1% today to 6,196 points.

Big banks on the rise

The share prices of the big ASX banks all rose today.

The National Australia Bank Ltd (ASX: NAB) share price went up 2%, the Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price grew 3.2% and the Westpac Banking Corp (ASX: WBC) share price climbed 2.5%.

Commonwealth Bank of Australia (ASX: CBA) saw its share price go up 1.7% today after holding its annual general meeting (AGM). The major ASX 200 bank highlighted that it’s in a strong position and continues to be a good option for dividends.

Telstra Corporation Ltd (ASX: TLS) commits to its dividend

The ASX 200 telco giant also held its AGM today. It gave out some commitments and also shared some interesting information.

It said that it aspires that all calls from its consumer and small business customers will be answered in Australia by the time the T22 strategy is completed. Telstra also said that its 5G network now covers 40% of the Australian population.

Telstra said that with the establishment of Telstra InfraCo, it is positioned to be able to make a play for involvement in the privatisation of the NBN, if that happens.

The board of Telstra said it was acutely aware of the importance of dividends to shareholders. It said that it’s prepared to temporarily exceed its capital management to continue paying a $0.16 annual dividend per share, though that’s not guaranteed.

The ASX 200 share’s dividend will depend on whether the free cash flow would support the dividend and whether underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of $7.5 billion to $8.5 billion is achievable after the rollout of the NBN.

However, Telstra said that it won’t be able to meet a target of earning a return on invested capital (ROIC) of more than 10% by the end of FY22. It’s aiming for ROIC of more than 7% by FY23.

Service Stream Limited (ASX: SSM)

Service Stream announced today that it has extended its operations and maintenance master agreement (OMMA) with the NBN for an additional six months from the end of December 2020, with an option to extend for a further six months to December 2021.

The ASX 200 company will continue to be responsible for performing operations and maintenance field services for the NBN including service activations and service assurance activities.

Revenue generated for Service Stream will be dependent on the work volumes. Under the existing agreement, the ASX 200 company generated $330 million of revenue in FY20 and $280 million in FY19.

Another strong quarter from Hub24 Ltd (ASX: HUB)

Financial technology business Hub24 released a strong quarterly update today for the three months to 30 September 2020.

It said that its funds under administration (FUA) of $19 billion was up 32% compared to the prior corresponding period.

Hub24 achieved record net inflows for a September quarter of $1.36 billion, up 10% compared to the first quarter of FY20. That record inflow was up $260 million compared to the June quarter.

Management boasted that the Hub24 platform’s market share increased to 2.1% in the quarter.

The ASX 200 share maintained second place for both quarterly and annual net inflows.

Hub24’s new business pipeline continues to grew with 27 new licensee agreements signed during the quarter and 101 new advisers using the platform.

The company believes that the new business pipeline will continue to grow as additional opportunities emerge given adviser movement from institutional licensees and further industry consolidation.

More reading

• Top brokers are urging you to buy these ASX stocks today
• 3 reasons I don’t use stop-loss orders for ASX shares
• 3 ASX 200 growth shares to buy today
• The Unibail (ASX:URW) share price is climbing today. Here’s why.
• ASX 200 up 0.9%: Telstra dividend update, Afterpay & Xero hit record highs

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Hub24 Ltd. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Hub24 Ltd and Service Stream 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 Scott Phillips.

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The Dug Technology Ltd (ASX: DUG) share price is climbing today after the company announced a deal with an oil and gas supermajor. The Dug share price has been on a rocky ride since listing in early August. Dug shares are trading 2.44% higher at $1.26 at he time of writing.

What Dug does

Dug is an Australian supercomputing company based in Perth. The company has a rags-to-riches story with its first office built in co-founder Matthew Lamont’s backyard. Since then, Dug has grown at an astounding rate to now operate four major international offices in Perth, London, Houston and Kuala Lumpur.

Dug makes its money through high performance computing as a service (HPCaaS). Its computers are typically used to analyse large datasets in the mining industry. However, in 2019 Dug launched its fully integrated Dug McCloud platform. This enabled the company to offer HPCaaS, scientific data analysis services and software solutions to a range of scientific sectors outside the resources industry.

Its computers are among some of the world’s most powerful and green supercomputers.

Supermajor deal

The Dug share price went up on news the company had signed a deal with a large oil and gas supermajor. The deal is expected to generate more than US$1 million in revenue over the next 12 months.

A supermajor is the name used to describe the world’s six or seven largest publicly traded oil and gas companies. Some of the supermajors include BP plc (NYSE: BP), Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX). 

Dug managing director Dr Matt Lamont said the deal was “a great endorsement of our technology and reliability to receive ongoing work from one of the largest and most technically savvy companies on the planet”.

Foolish takeaway

Dug is the first supercomputer company ever to list on the All Ordinaries Index (ASX: XAO). The Dug share price has fallen since its initial public offering (IPO) at $1.50 but shareholders will be hoping the news can spark a turn around in the share price.

More reading

• Investing $1,000 in these 3 ASX shares could be a very smart move
• Here’s why the Codan (ASX:CDA) share price hit a record high today
• Top brokers are urging you to buy these ASX stocks today
• 3 reasons I don’t use stop-loss orders for ASX shares
• Could these ASX 200 tech shares at 52-week highs go higher? 

Motley Fool contributor Daniel Ewing has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Scott Phillips.

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If you’re looking to invest $1,000 into the share market right now, then there are a lot of quality options to choose from.

Three ASX shares that I think would be smart choices are listed below. Here’s why I like them:

a2 Milk Company Ltd (ASX: A2M)

A2 Milk Company is a New Zealand-based infant formula and fresh milk company. It differentiates itself from the competition by focusing purely on A2-only products. The company claims that these are easier to stomach than regular dairy products. This unique selling point has gone down particularly well in China, where dairy intolerance is high. Strong demand in this key market has underpinned exceptionally strong sales and earnings growth over the last few years. I’m confident that there will be more of the same in the years to come. This could be supported by new product launches and value accretive acquisitions.

REA Group Limited (ASX: REA)

REA Group is the operator of the realestate.com.au website and several international real estate listings websites. Although the local housing market is struggling at the moment because of the pandemic, I’m optimistic that volumes will bounce back strongly in 2021. Especially given forecasts for a rebound in house prices next year. I expect this, combined with its cost cutting and strong pricing power, to lead to solid profit growth in the second half of the current financial year and beyond.

ResMed Inc. (ASX: RMD)

ResMed is a sleep treatment focused medical device company. I believe it can grow its earnings at strong rate over the next decade thanks to its massive market opportunity. Management estimates that there are 936 million people with sleep apnoea globally and over 380 million people who suffer from chronic obstructive pulmonary disease (COPD). Due to the quality of its hardware and software solutions, I expect it to benefit greatly as more and more of these sufferers are diagnosed and seek treatments.

More reading

• Where I’d invest $20,000 into ASX shares right now
• The A2 Milk (ASX:A2M) share price looks great to buy this week
• 3 five-star ASX shares to buy next week
• ASX 200 down 0.2%: Big four banks drop, CIMIC jumps, CSL slides lower
• How vulnerable is the A2 Milk share price amid the trade stoush?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended A2 Milk. The Motley Fool Australia has recommended REA Group Limited and ResMed Inc. 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 Scott Phillips.

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The Codan Limited (ASX: CDA) share price has been on form again on Tuesday and charged higher.

At one stage today the electronic products company’s shares hit a record high of $12.96.

When the Codan share price reached that level, it stretched its year to date gain to a massive 78%.

Why is the Codan share price at a record high?

Investors have been buying Codan shares this year after its very strong performance in FY 2020 and expectations for another strong 12 months ahead.

In August the company released its full year result and revealed a 29% increase in sales to a record of $348 million.

This was driven largely by strong metal detector demand due to a surge in the gold price over the last year after central banks across the world slashed interest rates.

Things were even better on the bottom line thanks to its improving margins. Codan reported a record statutory net profit after tax of $64 million. This was an increase of 40% over the prior corresponding period.

Codan’s free cash flow was also very strong at $78 million, increasing its cash balance to $93 million.

How is FY 2021 going?

Although the company decided against providing guidance for FY 2021, it revealed that the new financial year had started strongly.

It noted that Minelab is expected to benefit from a full year of Vanquish sales and the release of a new gold detector. Whereas Minetec is expected to return to profitability.

Since then, last month the company announced a major new contract win. This contract is with a large African government to supply tactical communications equipment.

Codan advised that the contract has a value in the order of US$10 million and includes the supply of Sentry-HTM radios and accessories. It expects this order to be delivered in the second half of FY 2021.

What’s next?

A further update is likely to be released at its annual general meeting in a couple of weeks. I would suggest investors keep an eye for that.

More reading

• Codan (ASX:CDA) shares hit new all-time high

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Scott Phillips.

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ASX shares have recovered from their September losses as they staged an extraordinary rally this month. It’s not too late to join the party and these three ASX stocks are the latest buy ideas from leading brokers.

The S&P/ASX 200 Index (Index:^AXJO) jumped 1.3% in after lunch trade today, taking its gain since the start of October to around 7%.

Profit miss a buying opportunity

Cashed up bargain hunters might want to put the Orica Ltd (ASX: ORI) share price on their watchlist. Goldman Sachs reiterated its “buy” recommendation on the stock even after management issued a disappointing earnings update.

The explosives maker said its FY20 earnings before interest and tax (EBIT) will be slightly above $600 million. This compares to consensus expectations of $611 million.

“While commentary was fairly limited, ORI’s update points to volumes down 15% in 2H20, at the bottom end of the company’s 10-15% guidance range on the back of developing market COVID impacts,” said the broker.

“The company also delayed FY20 reporting by two weeks to 20 Nov due to SAP integration delays (now fully live).”

But Goldman believes the worst is behind the company and that Orica will return to growth in FY21 and FY22. It also said that this is an attractive entry price to the stock and its 12-month price target on Orica is $20.30 a share.

ASX stock zooming onto the buy list

Another stock to watch is the Bapcor Ltd (ASX: BAP) share price. The stock is a favourite among brokers and Macquarie Group Ltd (ASX: MQG) repeated its “outperform” recommendation on it following management’s quarterly update.

The auto parts company reported a 27% increase in sales for the September quarter when compared to the same time last year. It is expecting a strong first half but did not provide full year guidance due to the unpredictable operating environment.

Macquarie calls the stock a “quality exposure to defensive end markets” and pointed to its attractive valuation.

The BAP share price is trading at around a 14% and 7% discount to the S&P/ASX SMALL ORDINARIES (Index: ^AXSO) on a FY21 and FY22 EV/EBIT basis, respectively.

The broker’s 12-month price target on the stock is $8.50 a share.

Underappreciated asset value

Finally, UBS restated its “buy” call on the CSR Limited (ASX: CSR) share price. This isn’t so much for the potential rebound in construction activity but for the value of its land bank.

CSR sold Horsley Park Stage 3 for $84.3 million. This land parcel is a 8.6-hectare industrial block in Western Sydney and the price was 38% higher than Stage 2.

“CSR’s large land bank in Western Sydney is leveraged to the long term thematic of rising demand for industrial land,” said UBS.

“In addition, the development of Sydney’s second airport at Badgerys Creek further adds to demand.”

While the market is waking up to the value of its land assets, the broker believes the share price is still underappreciated.

UBS’ 12-month price target on the stock is $4.77 a share.

More reading

• 3 ASX 200 growth shares to buy today
• The Unibail (ASX:URW) share price is climbing today. Here’s why.
• ASX 200 up 0.9%: Telstra dividend update, Afterpay & Xero hit record highs
• This ASX share is recession-proof
• 5 things to watch on the ASX 200 on Tuesday

Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Bapcor and Macquarie Group 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 Scott Phillips.

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Stop-loss orders are becoming an increasingly popular mechanism for ASX investors to use in the course of their investing. On the surface, a stop-loss order looks too good to be true. You buy shares, and then issue a stop-loss order to your broker, which tells them to bell those shares if they fall to a certain price. You get to capture all of the potential upside of your investment, while at the same time taking the possibilities of a portfolio-crushing loss off the table. Win-win, right?

Well, personally, I don’t think stop-losses are such a good idea, regardless of how nice they sound. Here are 3 reasons why:

3 reasons I avoid stop-loss orders

You won’t necessarily get the price you want with a stop-loss

Stop-loss orders work by setting a ‘floor price’ for an ASX share. If that floor price is hit at any time, the shares are automatically sold. So say you want to buy Commonwealth Bank of Australia (ASX: CBA) shares today. Right now, these will cost you $69.68 (at the time of writing). Say you bought them at that price, together with a stop-loss order dictating your broker to sell the shares if they dip under $67 – limiting you to a 3.85% loss if things go south.

Well, that’s what you might think happens. But sometimes, the market doesn’t always cooperate with us. In times of extreme selling pressure (like we saw back in March) the proportion of buyers and sellers in the market shifts dramatically. What if the market crashes tomorrow, and no one wants CBA shares at anywhere near $67? If there is indeed a (hypothetical) run on CBA shares, your stop-loss might kick in at $67, with no willing buyers. Your broker will then try and offload the shares at the best price it can, but this could be dramatically lower. You might find your stop-loss ends up selling out at $57 instead of $67. Suddenly your 3.85% loss turns out to be an 18.2% howler. 

Shares usually go up

Most companies’ share prices bounce around all the time. But most, in the end, tend to trend up over time, even though the line isn’t usually nice and smooth. If you buy an ASX share hoping to make money over the long term, why would you want to sell out of it when it has what might well turn out to be a very temporary setback? Look at the Afterpay Ltd (ASX: APT) share price. It’s sitting at a new record high today. But the path to its current level had more ups and downs than a rollercoaster ride. Anyone using a stop-loss on Afterpay would have lost money over the past year. 

Warren Buffett says so

One of legendary investor Warren Buffett’s best-known quotes is something like this: ‘If you don’t plan on holding a company for 10 years, don’t even think about owning it for 10 minutes’. That presumably means ‘don’t use stop-loss orders’, because Warren Buffett’s quote doesn’t have ‘unless the share price drops’ on the end of it. Buffett has held many of his own companies for decades and decades, and through plenty of peaks and troughs. Do you think he uses stop-loss orders for any of those positions? Definitely not. Enough said.

More reading

• Why the Afterpay (ASX:APT) share price has hit a new record high
• Zip and Estrella Resources were among the most traded shares on the ASX last week
• ASX 200 up 0.9%: Telstra dividend update, Afterpay & Xero hit record highs
• Why Afterpay, HUB24, NEXTDC, & Telstra shares are storming higher
• 3 takeaways from the Commonwealth Bank (ASX:CBA) annual general meeting

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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 Scott Phillips.

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