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I often write about either waiting for a company’s results to be released before making a decision, or buying ahead of the results announcement.
Readers frequently ask me about the difference.
It’s a fair question and not easy to answer.
But mostly it is about weighing up possible known or unknown risks.
Take, for example, the recent Aspen results. With the stock trading at around R130 to R140 per share ahead of the results and on a price-to-earnings ratio (P/E) of around 11 times, it certainly seemed cheap – even with management only offering guidance on revenue growth of some 1% to 4%.
This could be seen as very modest revenue growth.
Also notable was the lack of guidance on growth in headline earnings per share (HEPS).
There was a lot that was unknown.
Added to this uncertainty was the debt situation at the company.
Aspen was in breach of debt covenants, which the sale of its milk formula business was supposed to correct.
But the company has been surprising markets to the downside for a number of results recently.
The risks, therefore, were high.
Now, if the results had come out and been amazing the stock would have rallied and buyers would have had to pay a higher price.
But, in this case, the results were worse, and the stock collapsed. So, had you waited, it would have been worth it.
Waiting may mean paying a higher price, but that higher price comes at a lower level of risk.
And that’s ultimately what investors want to do – manage risk.
Often investors will have a fair idea of what to expect ahead of a results announcement.
If this is the case, you will be more comfortable with what is expected and, as such, the risk.
Sasol* is a good example.
Its results were largely as expected.
Operations at its Lake Charles plant will be starting, which means the spending at the plant will now come to an end.
It will be generating cash flow, which will likely end up as dividends.
The surprise here was the slight delay of the Lake Charles project.
There had been some talk of it, but it was unlikely that a delay would be material.
Sure, it would push profits from the venture further into the future, but profits would still be coming in time.
The decision to wait (or not) for results to be released before making an investment move really centres on the level of certainty you have about those upcoming results.
Higher certainty doesn’t mean you’ll necessarily be right, but you will in all likelihood be right more often than not.
If you lack certainty about upcoming results, it is usually prudent to wait and see how they play out.
This does mean that I often sit with a list of stocks that I am interested in in one way or another, but I am waiting for a higher level of certainty before making a decision.
It is also worth noting that the longer one has to wait, the more the potential risk increases.
Here Vivo Energy is perhaps a good example.
While I like the business thesis, I am concerned about its activities in Morocco, where the king is expected to introduce fuel regulations. So far, we’ve been waiting for some 18 months and my sense is that the longer the wait, the more the concern becomes that the decision will be bad.
But bad for who?
Bad for consumers if the king does away with regulated prices, as retailers can then set any price they choose.
It would be bad for retailers if a low regulated price is implemented, as their profits would diminish.
At this stage investors have no way of knowing which way it will go for Vivo’s largest market – so, we wait.
We won’t always get it right, but by waiting you avoid the scenario where you are holding shares that might experience a massive price plummet post-results.
And, overall, your portfolio will be better off.
*The writer owns shares in Sasol.
This article originally appeared in the 4 April edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.
