Many long-term investors have the desire to buy a stock with the intention of holding it forever. While some forever stocks exist out there, many investors find themselves “falling in love” with certain stocks in spite of any downward revisions to the long-term investment thesis.
Oftentimes, investors would be best served by buying and staying “in the know,” rather than turning a cold shoulder to the news stories to a company’s management and their commentary when it’s that time of the year (or quarter).
Thus, I’d encourage investors, especially retirees, to remain informed after purchasing shares of any security, especially those high yielding securities that may have limited financial wiggle room when the economy grinds to a halt.
When circumstances change, it’s okay to “break up” with a market darling that you once held a special “forever” spot in your portfolio. People change over time, and so do businesses (more so in fact). With that in mind, it makes sense to ensure that your original investment thesis (and checklist of conditions) is still met over time.
Because like it or not, your relationship with a stock under question could stand to sour at a whim. Whether the cause of the souring is due to macro issues, a company ending up on the wrong side of a secular trend, the deteriorating financial condition of balance sheet, or the dismantling of a management team, you shouldn’t hesitate to hit the sell button should things change for the worse.
Dollarama (TSX:DOL) is a prime example of a company that investors should have ditched to the curb earlier last year when I claimed the writing was on the wall and that the stock was ripe for a massive correction in share price.
I noted management’s shortcomings, most notably their failure to adapt to significant changes in the competitive landscape in the North American discount store scene, their unwise decision to repurchase their own shares at a time of local overvaluation, and the potential for slowed growth due to the rise of the all too powerful e-commerce disruptor that shall not be named!
Indeed, Dollarama wasn’t as strong as it used to be. And at over 36 times trailing earnings, the stock was priced with what I believed were unrealistic near- and long-term growth expectations.
Today, Dollarama stock is down 39% from peak levels, with a more modest but still expensive 24.4 trailing P/E. Although I do like management’s decision to potentially roll out a bulk sale e-commerce platform, the stock still ain’t cheap down here. And while high double-digit top-line CAGR numbers could still be in the cards over the medium term, it appears that there’s no margin of safety to be had, so I’d encourage investors to wait for a better price.
Don’t fall in love with your stocks! Dollarama was a major multi-bagger throughout many years. And for those who lost track of the company, the industry landscape, and the valuation, a big chunk of their gains were surrendered at the hands of Mr. Market.
If the story changes, don’t be afraid to “break up” with a stock, at least temporarily!
Stay hungry. Stay Foolish.
Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share. Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune. Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.
Fool contributor Joey Frenette has no position in any of the stocks mentioned.