The QBE Insurance Group Ltd (ASX: QBE) share price is falling on Friday following the release of its full year results.

At the time of writing, the insurance giant’s shares are down 9% to $11.51.

QBE share price sinks after earnings miss

• Gross written premiums (GWP) up 25.7% (21% in constant currency) to US$18,453 million
• GWP ex Crop up 18% year on year
• Underwriting profit up 316% year on year to US$695 million
• Combined operating ratio of 93.7%
• Statutory net profit after tax of US$750 million, compared to loss of US$1.5 billion
• Adjusted net cash profit after tax of US$805 million
• Final dividend of 19 Australian cents per share, bringing the FY 2021 dividend to 30 Australian cents per share

What happened in FY 2021?

For the 12 months ended 31 December, QBE delivered a 25.7% increase in GWP (or 21% in constant currency) to US$18,453 million. This reflects the strong premium rate environment as well as improved customer retention and new business growth across all regions. Management also notes that growth in Crop was especially strong at 51%. This was due to the significant increase in corn and soybean prices, coupled with targeted organic growth.

Positively, premium rate increases are ongoing with company-wide renewal rate increases averaging 9.7% during the year. This is consistent with the first half and 9.8% in FY 2020. And while premium rate momentum moderated slightly in International across the year, momentum accelerated in North America and Australia Pacific during the second half.

As for its profits, QBE reported a statutory FY 2021 combined operating ratio of 93.7%. This compares favourably with 104.2% in the prior year, which was significantly impacted by COVID-19 claims and adverse prior accident year claims development. Anything below 100% is profitable and vice versa if the ratio is above 100%.

This ultimately led to the company reporting a statutory net profit after tax of US$750 million, up from a loss of US$1.5 billion a year earlier. And on an adjusted net cash basis, its profit after tax came in at US$805 million.

While this looks strong on paper, it is below the market consensus estimate of US$870 million. This may explain the weakness in the QBE share price today.

Outlook

QBE’s new CEO, Andrew Horton, was pleased with the year and appears cautiously optimistic on the future.

He said: “Following another year of elevated natural catastrophe claims costs alongside rising inflationary signals and continued low interest rates, the industry operating environment remains highly uncertain. Because of this, the premium pricing environment is likely to remain positive in 2022.”

“In light of this, we expect gross written premium growth to be in the high single digits in 2022. Moreover, delivery against our strategic priorities should result in an improved and more consistent return profile over time such that the Group is capable of consistently delivering a low to mid-90’s combined operating ratio. “In FY22, we expect the business will achieve further steady improvement on the FY21 ‘exit’ combined operating ratio of ~94%.”

The post QBE (ASX:QBE) share price sinks 9% on FY21 earnings miss appeared first on The Motley Fool Australia.

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• Is the ASX value shares party just getting started?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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At today’s Commonwealth Bank of Australia (ASX: CBA) share price, is the big four ASX bank expected to offer an attractive FY22 dividend yield?

Commonwealth Bank is one of the largest banks in Australia, along with National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group Ltd (ASX: ANZ). Macquarie Group Ltd (ASX: MQG) is also one of the biggest financial institutions now.

Big banks like CBA are well known for their income credentials. They have relatively low price/earnings ratio (p/e ratio) multiples. Banks usually have quite high dividend payout ratios. That combination can lead to an attractive dividend yield.

But sometimes a dividend yield can take a big hit if a company decides to reduce the dividend, like what happened during 2020 when COVID-19 struck. Bank debt provisions went up, profit went down and financial companies were told to reduce their dividend payout ratios by the financial regulator.

But those COVID effects are now unwinding and the CBA half-year profit reflected this. Expectations of higher profits can be a driver of the CBA share price.

FY22 half-year profit grows

CBA reported that for the six months to 31 December 2021, statutory net profit after tax (NPAT) went up 26% to $4.74 billion, whilst cash net profit grew 23% to $4.75 billion.

The bank explained that NPAT was supported by strong business outcomes, reduced remediation costs and lower loan loss provisions due to an improved economic outlook but impacted by lower margins.

Australia’s biggest bank revealed a high level of lending volume growth. Home lending increased by 8.5% (or $40.4 billion), whilst business lending went up by 12.5% (or $13.2 billion).

It maintained a high level of surplus capital with a common equity tier 1 (CET1) capital ratio of 11.8%. Lending volume growth offset a reduction of the net interest margin (NIM). The NIM dropped 14 basis points year on year due to lower-yielding liquid assets, increased switching to lower margin fixed home loans and continued pressure with home loan competition.

The half-year dividend was grown by 17% to $1.75 per share.

Annual dividend expectations

Analysts are expecting more dividend growth in the FY22 annual result. There are lots of different estimates out there.

The Commsec estimate, which comes from an independent third party, puts the FY22 dividend yield at 5.6% at the current CBA share price with a potential annual payment of $3.84 per share.

Citi thinks that CBA will pay a grossed-up dividend yield of 5.6%. Morgan Stanley reckons CBA will have a grossed-up dividend yield of 5.5%. Both of these brokers have a ‘sell’ rating on the bank.

One of the most pessimistic brokers on the bank, Morgans, reckons that CBA is a sell (with a price target of $77) and the FY22 grossed-up dividend yield will be just 5.1%.

CBA share price snapshot

Since the start of the year, the CBA share price has dropped 3.6%.

The post At today’s CBA (ASX:CBA) share price, how big will the FY22 dividend yield be? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Macquarie Group Limited and Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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A2 Milk Company Ltd (ASX: A2M) shares will be in focus next week when the struggling infant formula company releases its half year results.

Ahead of the release, let’s take a look to see what is expected from the former market darling.

What is the market expecting from A2 Milk?

Expectations are very low for A2 Milk again in FY 2022 due to tough trading conditions and changing consumer preferences in China.

According to CommSec, the market consensus estimate is for a net profit after tax of NZ$60 million for the six months ended 31 December. This will be down 50% from NZ$120 million during the prior corresponding period.

The team at Morgans agrees with the view that A2 Milk will post a sizeable reduction in profits again.

It said: “We expect 1H22 NPAT will be down materially on the pcp given lower revenue, increased costs, five months of MVM losses, higher D&A, reduced interest income and a much higher tax rate.”

What about the full year?

Unfortunately, a similarly subdued performance is expected in the second half. For example, Bell Potter is forecasting full year net profit after tax of NZ$117.7 million on revenue of NZ$1,346.1 million. This profit is less than what it recorded during the first half of FY 2021.

However, despite its struggles, Bell Potter remains positive on A2 Milk shares. In fact, the broker has a buy rating and $7.70 price target on the company’s shares. Based on where they are trading at present, this implies potential upside of 45% over the next 12 months.

Bell Potter is positive on the future and sees potential for a big recovery in its earnings over the coming years.

It said: “We see the scope for EPS to double by FY26e, if A2M can execute on the China offline expansion strategy, while regaining 50% of the lost sales (from FY20-21) in English label IMF. Exiting the loss making US assets or navigating a turnaround at the MVM asset would likely accelerate this turnaround. We do not see the current share price as reflecting this potential.”

The post Own A2 Milk (ASX:A2M) shares? Here’s what to expect when the company reports on Monday appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened 

The value of cryptocurrencies dropped rapidly on Thursday as investors try to decipher what kind of regulation is coming to the industry in the U.S. The White House appears ready to push for regulation on the cryptocurrency industry and that uncertainty alone is spooking investors. 

As of 2 p.m. ET, Bitcoin (CRYPTO: BTC) had dropped 6.3% in the last 24 hours, Ethereum (CRYPTO: ETH) was down 6.2%, and Dogecoin (CRYPTO: DOGE) had fallen 5%. The drop has been pretty steady over the last day and doesn’t appear to be stopping at the moment. 

So what 

Current reports are that President Biden will issue an executive order next week asking for a variety of agencies to study cryptocurrencies and other digital assets. The agencies include the Departments of Treasury, State, Justice, and Homeland Security, with smaller agencies also asked to do technical reports. 

One concern is the risk to financial stability from cryptocurrencies, which have traditionally been much more volatile than currencies or even the stock market. Understanding those risks will be a part of the study. The technical aspects could also be important, which could lead to regulations intended to safeguard people’s digital assets. Given the fraud and hacking that’s taken place in cryptocurrencies over the last year, this type of regulation may be welcomed by the industry. 

We have seen big banks, small credit unions, venture capital firms, and publicly traded companies all lobby for regulation from Washington, D.C. to at least set the playing field for the industry. So an executive order like this isn’t surprising, but it’s a risk that some investors may not be willing to take right now. In any market, uncertainty is seen as a bad thing, causing selling to take place. 

It’s also worth noting that the stock market overall is down today and cryptocurrencies typically fall when the market is down. So that move could be part of the reason Bitcoin, Ethereum, and Dogecoin are down today. 

Now what 

Long term, it’s going to be a positive thing for cryptocurrencies and the crypto economy for regulation to be written. But it’s not entirely clear if the current Congress or administration is friendly to crypto or not. 

Companies and investors have been trying to get Congress and regulators to write favorable rules for years, but they’ve been fighting an uphill battle so far. Now that this is a multi-trillion dollar market it seems that political leaders are starting to take it more seriously. 

While I think that long term it’s good that crypto will get a regulatory framework, I expect there to be ups and downs in the process. Markets don’t like regulation or uncertainty, so while this expected executive order is probably a good thing for cryptocurrencies long term, the short-term reaction may still be negative. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why Bitcoin, Ethereum, and Dogecoin plunged today appeared first on The Motley Fool Australia.

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Travis Hoium owns Ethereum. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and recommends Bitcoin and Ethereum. The Motley Fool Australia owns and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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With demand for lithium growing strongly, analysts have consistently been revising their price forecasts higher over the last 12 months. This bodes well for the many lithium shares that are trading on the Australian share market.

But which lithium shares should you buy? Three that Bell Potter rates as buys today are listed below. Here’s what you need to know about them:

Allkem Ltd (ASX: AKE)

According to the note, Bell Potter has upgraded this lithium miner to a buy rating with a vastly improved price target of $17.00.

The broker explained: “The higher lithium price outlook has resulted in large upgrades to our AKE earnings outlook and valuation. EPS changes in this report are: FY22 +12%; FY23 +76%; and FY24 +131%. Our target price is now $17.51/sh (previously $11.00/sh). We have upgraded our recommendation to Buy.”

The broker believes Allkem is “a go-to stock for multi-project exposure to lithium markets.’

Lake Resources N.L. (ASX: LKE)

Bell Potter has retained its speculative buy rating and lifted its price target on this lithium developer’s shares to $1.82.

The broker said: “LKE’s key project is the 50ktpa lithium carbonate Kachi Lithium Brine Project in Argentina. This project is expected to employ direction lithium extraction technology which has enormous ESG benefits compared with incumbent brine and hard rock lithium production methods. With this development project, uncommitted product offtake and an independent share register, LKE has strategic appeal.”

Liontown Resources Limited (ASX: LTR)

Finally, Bell Potter has retained its speculative buy rating on this lithium developer’s shares and increased the price target on them to $3.06. Its analysts note that the company has recently signed a deal with auto giant Tesla.

Bell Potter commented: “LTR has entered a binding term sheet with Tesla for supply of up to 150ktpa spodumene concentrate from the Kathleen Valley project, adding to an agreement last month with major global battery producer LG Energy Solution (LGES). LTR now has binding term sheets in place for over half of the expected initial production from Kathleen Valley, with offtake pricing linked to market prices for lithium hydroxide. Lithium price upgrades increase our LTR valuation to $3.06/sh.”

The post Broker names 3 ASX lithium stocks to buy with huge upside potential appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro owns Orocobre Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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If you’re building an income portfolio, then you may want to look at the ASX shares listed below.

Both ASX dividend shares offer attractive yields and have been named as buys by analysts. Here’s what you need to know about them:

BHP Group Ltd (ASX: BHP)

The first ASX dividend share to consider buying is this mining giant. BHP has a collection of world class operations across a number of locations and commodities. The latter includes Petroleum, Potash, Copper, Iron ore, Coal and Nickel. Though, the company is in the process of spinning out its petroleum assets via a merger with Woodside Petroleum Limited (ASX: WPL), which shareholders will be given a slice of.

As we saw with its recent results, these commodities are commanding favourable prices at present, which is underpinning significant free cash flow generation. This is expected to continue in the near term and support generous dividend payments.

Macquarie, for example, is forecasting fully franked dividends of $4.19 per share in FY 2022 and $2.54 per share in FY 2023. Based on the current BHP share price of $47.97, this will mean yields of 8.7% and 5.3%, respectively.

Its analysts have an add rating and $54.00 price target on the company’s shares.

Centuria Industrial Reit (ASX: CIP)

Another ASX dividend share to consider is Centuria Industrial. It is a property company with a focus on high quality industrial assets that deliver income and capital growth to investors.

In FY 2022, Centuria Industrial has been experiencing strong nationwide demand for industrial space, particularly from ecommerce-related tenant customers. This resulted in Centuria Industrial reporting strong rental income growth and a 26% increase in funds from operations (FFO) to $53.9 million during the first half.

The good news for income investors is that this positive form bodes well for dividends. Morgan Stanley, for instance, is forecasting Centuria Industrial REIT to pay above guidance distributions of 18.1 cents per share this year and in FY 2023.

Based on the current Centuria Industrial REIT share price of $3.83, this will mean 4.7% dividend yields for investors. Morgan Stanley also sees decent upside. It has an overweight rating and $4.35 price target on the company’s shares.

The post 2 buy-rated ASX dividend shares with big yields appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The fund manager Wilson Asset Management (WAM) has recently identified two top small cap ASX shares that it owns in its portfolio that could be ideas.

WAM operates several listed investment companies (LICs). Some focus on larger companies like WAM Leaders Ltd (ASX: WLE) and WAM Capital Limited (ASX: WAM).

There’s also one called WAM Microcap Limited (ASX: WMI) which targets small cap ASX shares with a market capitalisation under $300 million at the time of acquisition.

WAM says WAM Microcap targets the most exciting undervalued growth opportunities in the Australian microcap market.

The WAM Microcap portfolio has delivered gross returns (that’s before fees, expenses and taxes) of 22.2% per annum since inception in June 2017, which is superior to the S&P/ASX Small Ordinaries Accumulation Index average return of 9.5%.

These are the two small cap ASX shares that WAM outlined in its most recent monthly update:

Austin Engineering Ltd. (ASX: ANG)

Austin Engineering manufactures and supplies specialised mining products that improve efficiency and assist decarbonisation efforts for clients globally.

At the moment, Austin Engineering is undergoing a ‘three-phase’ optimisation plan under the guidance of its newly appointed CEO and Managing Director, David Singleton.

In December 2021, the small cap ASX share reported a five-year contract renewal with Rio Tinto Limited (ASX: RIO).

WAM pointed out that in January 2022, the company announced updated guidance relating to the FY22 first-half earnings before interest, tax, depreciation and amortisation (EBITDA) to $11.5 million and indicated an increase in EBITDA margins across the group, signalling that the company’s turnaround strategy is delivering.

Wilson Asset Management is positive that the company will see revenue and EBITDA grow across the Asia-Pacific, North America and South America sites with the execution of its three-phase plan.

Generation Development Group Ltd (ASX: GDG)

Generation Development is the owner of Generation Life. It specialises in investment bond products which provides tax-effective investment solutions.

In January, Generation Development released its December quarter update. It showed its highest-ever sales inflow for the quarter and a 44% increase in funds under management, compared to the previous corresponding period.

Generation Life achieved a 52% market share of annual sales inflows in the three months to September 2021, growing from 40% in the prior corresponding period.

WAM remains positive on the small cap ASX share ahead of its upcoming launch of the investment-linked lifetime annuity, subject to regulatory approval, and the next instalment of investment bonds that the fund manager believes will further bolster the company’s customer value proposition.

The post 2 compelling small cap ASX shares rated as buys appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison owns WAM MICRO FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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It hasn’t been a fun week for Fortescue Metals Group Ltd (ASX: FMG) shareholders. The Fortescue share price has fallen 10% and the FY22 half-year dividend was cut. So why is spending growing at Fortescue Future Industries (FFI)?

For readers that don’t know, FFI is aiming to take a global leadership position in green energy and green technology, leading the effort to decarbonise hard-to-abate sectors.

FFI is investing to create a global portfolio of green energy projects to create 15 million tonnes per year of renewable green hydrogen by 2030.

Fortescue has committed to setting aside 10% of its net profit after tax (NPAT) to put towards Fortescue Future Industries each year.

Dividend cut, yet FFI spending is up?

Earlier this week, Fortescue released its result for the six months to 31 December 2021.

Whilst it was one of the strongest halves in the company’s history, it did show a decline year on year.

There was a 16% decline of average revenue per dry metric tonne of iron ore. Revenue fell 13%. Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 28% to US$4.76 billion and net profit after tax declined 32% to US$2.78 billion. Operating cash flow fell 52% to US$2.1 billion.

The dividend was cut 41% to US$0.86 per share. The dividend payout ratio was reduced from 80% to 70%.

But the spending on Fortescue Future Industries is ramping up. FFI’s FY22 anticipated expenditure is US$400 million to US$600 million, including US$100 million to US$200 million of capital expenditure and US$300 million to US$400 million of operating expenditure.

As at 31 December, the unutilised funding commitment (of 10% of net profit) was US$651 million, after the first half operating and capital expenditure of US$242 million.

Fortescue’s justification

The Australian Financial Review recently ran an article discussing how some Fortescue investors are not convinced by the green focus shift of the business. Why redirect 10% of net profit each year to FFI when that money could be coming to shareholders as profits?

An argument is that Fortescue chair Dr Forrest could have funded FFI himself privately by increasing Fortescue’s dividend payout ratio.

But Fortescue’s answer is that it’s a useful diversification play away from being dependent on Chinese demand for iron, though the company is also looking for other commodities like copper in some of its tenements.

The AFR quoted Elizabeth Gaines, the current CEO, who said that FFI adds a lot of potential financial gains to Fortescue:

Our view is that the market is recognising that there is genuine value that’s being created by FFI and the ambitions that we have.

We’re seeing interest, certainly from our offshore investors, in the activities of FFI, the strategy that we will deliver on by 2030, and the efforts to decarbonise Fortescue.

A lot of analysts are putting in the capital for decarbonising iron ore operations. They’re doing that for us and our competitors. They’re putting in the costs, but they’re not actually modelling the benefits.

The benefits will be lower energy costs, better ESG outcomes and lower emissions. We won’t have to rely on expensive offsets. There are genuine benefits, and I think there is still a disconnect between the cost versus the value that’s created.

Fortescue share price snapshot

Whilst Fortescue shares have dipped this week, the share price has still gone up by around 40% over the last four months.

The post Dividends down, Fortescue (ASX:FMG) Future Industries spending up. Here’s the miner’s justification appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison owns Fortescue Metals Group Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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“Buy and hold” is the stock strategy most favoured at The Motley Fool — to allow quality companies to grow over the long term regardless of short-term market movements.

But it seems long-term investing is starting to fall out of favour.

Whether it’s because of a change in investor mindset or the advancement of technology, it seems we’re becoming more impatient with our shares.

According to Visual Capitalist, the average holding period of shares on the NYSE was just 5.5 months as of June 2020.

In the 1950s, the average holding time of a stock was eight years.

Why are we selling our shares so fast?

Cynics and market veterans would immediately blame the rise of meme stocks on this quest for a quick buck.

The internet and social media allow fervour for a particular business to whip up particularly quickly, regardless of its fundamentals.

A crowd of buyers pushes the share price up, then a small minority sell out for fast profits.

“Long-term investing has much less to offer in terms of excitement,” said Visual Capitalist writer Marcus Lu. 

“The recent r/wallstreetbets saga is an example of how the stock market can become sensational and fad-driven.”

But it’s not just very modern phenomena causing investors to become impatient.

Visual Capitalist pointed out a number of structural technology changes have been happening over many decades, enabling faster buying and selling.

“For example, in 1966, the NYSE switched to a fully automated trading system,” said Lu. 

“This greatly increased the number of trades that could be processed each day and lowered the cost of transactions.”

Indeed, in 1982 there was a daily average trading volume of 100 million, but by 2020 that had increased tenfold.

Automated exchanges also enable high-frequency trading (HFT). This is when computer algorithms buy and sell shares at rapid pace.

“HFT represents 50% of trading volume in US equity markets, making it a significant contributor to the decline in holding periods.”

Information is free and readily available

Democratisation of information is also a contributor to more active stock trading.

It was only in the 1990s when one had to pay a fee to receive hard copies of financial statements, days or weeks after the results were announced.

Now data on publicly listed companies is readily available free online. And investors can immediately act on the information through internet brokers.

Visual Capitalist also indicated that the lifespans of companies themselves have shortened.

“In 1970, companies that were included in the S&P 500 Index (SP: .INX) had an average tenure of 35 years,” said Lu.

“By 2018, average tenure was down to 20 years, and by 2030, it’s expected to fall below 15 years.”

The shorter life expectancy leads to two outcomes.

One is that it’s a greater incentive for investors to chase short-term returns, as they don’t know when it will all come to an end.

The other result is that there is a greater turnover of members that make up indices, contributing to shorter holding periods.

The post This is how long the average investor holds onto their shares appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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In the internet age, there is no shortage of information out there about which ASX shares to buy.

However, there is a dearth of advice on when to sell.

Fairmont Equities managing director Michael Gable argues that this is absurd.

“I would go as far as to say that the split in terms of importance is not 50-50,” he told SwitzerDaily. 

“I would say the most important skill is knowing when to sell.”

An investor can pick the most brilliant winners to buy but that all comes to nothing if they sell out of it too early or if they have another stock that’s plunged to zero.

“I have heard plenty of stories where clients picked Afterpay or CSL Limited (ASX: CSL) very early on but took a quick profit instead of achieving life-changing profits,” said Gable.

“Yet these same people often have a couple of stocks in the portfolio that have shed most of their value.”

The issue with holding onto losers, hoping they would come back to break-even, is that it will ensure your portfolio bleeds money.

“If we are happy to take profits at 5% or 10% but hold onto a ‘good business’ if it falls 20% to 40%, then you will never make progress,” said Gable.

“I see this strategy too often, and it is a losing strategy.”

And don’t forget, the bigger the losses, the harder it is to recover the deficit. 

Selling an ASX share that’s lost you 10% means you only need to buy a replacement investment that nabs 11% to make that money back. But not selling until a stock has lost 50% means the next investment needs to double!

It’s human nature to hold onto losers — but it makes no rational sense, according to Gable.

“My experience with investors is that the more a stock loses, the more reluctant they are to sell it. I hear things like ‘keep it in the bottom drawer’, or ‘it’s too late now’, and ‘I’m happy to hold it long term’ to justify what has been a bad investment,” he said. 

“And we all make bad investments, by the way. It is part of the territory.”

Share prices don’t correlate perfectly to company’s earnings

The trouble is, stock prices don’t move just according to company performance.

Emotions, or what finance professionals euphemistically call “sentiment”, have an impact. So do factors outside of the business’ control, like interest rates, government handouts and quantitative easing.

Gable said once an investor realises the market is not efficient but unpredictable, you stop having “conviction” about a stock but shift to a risk management mindset.  

“You can spend your whole life trying to understand the market to only come to the conclusion that you still know nothing,” he said.

“When you realise this, you start to think in terms of probabilities, not absolutes.”

To demonstrate how bad even the professional analysts are at judging the fortunes of an ASX share, Gable took Appen Ltd (ASX: APX) as an example.

In August 2020, after its half-yearly results, Appen shares fell 20% in one day. Analysts were climbing over themselves to tell investors this was a golden buying opportunity.

A year later, the stock fell a further 70%. Analyst target prices had also fallen by then, but they were still above the price at the time, indicating they still thought it was a buy.

“If the experts on the business get it wrong in such a spectacular fashion, then what chance does the average person have?” said Gable.

“We all get some wrong. It is inevitable. But we have to accept this and stop the bleeding at some point so it doesn’t hurt the rest of our portfolio. This is why risk management is important.”

So how and when do we sell a losing stock?

Without a firm selling strategy, retail investors won’t act fast enough to stem the bleeding. 

“By the time something has changed and the average person on the street becomes aware of it, the stock price has already been destroyed,” said Gable.

“The average investor can benefit from having a strategy in selling stocks that goes beyond waiting for an analyst to tell them that the ‘fundamentals’ have changed.”

Gable suggested a couple of selling strategies that retail investors can easily follow. 

The first is to see how the share price moves in reaction to good news. 

According to Gable, if the share price can’t rally upwards after positive news about the business, it is “a classic sell signal”. 

“You may have been too shell-shocked to sell Appen when it dropped 20% in one day,” he said.

“But if all the analysts release their reports in the next few days saying how wonderful the business is and are encouraging their clients to buy it, but the share price cannot recover, then that is a massive ‘tell’ on what is really going to happen.”

The moral of the story is that there is a major problem if the share price doesn’t do what it “should” be doing, especially when the rest of the market is fine.

“If the stock cannot rally on good news, then it is only going to go backwards. This is therefore a sell signal.”

The second strategy is to set a trailing stop.

This is to sell a stock when it falls beyond a certain amount from the current price.

“We only want to hold stocks that are in an uptrend. When this uptrend is over, it is time to sell. We are not concerned if the uptrend lasts 10 days or 10 years. We also don’t care if a stock is cheap or expensive,” said Gable.

“If it is going up, it is making you money. When it is going down, you are losing money.”

If a stock is doing well, this exit point will move up with the current price, ensuring you don’t cut a winner. But if the sentiment turns, then the trailing stop can “catch” you.

“Having some rules like this is one way to help those who are time-poor and/or not professional investors manage downside risk.”

The post When to sell your losing ASX shares appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo owns Appen Ltd and CSL Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Appen Ltd and CSL Ltd. The Motley Fool Australia owns and has recommended Appen Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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