Bargain Hunters: The Stock 86% Down…But Not Out

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Today’s Profit Watch is a tale of two stocks. Neither gets much attention from the mainstream press.

But you’ll be a better investor for following them from here.

The first one to put on your watch list is McGrath [ASX:MEA]. This is a real estate agency with a strong presence in Queensland and New South Wales.

It’s been a disaster ever since it listed on the ASX in December 2015. I’ve followed it the whole time.

You would think it is still a basket case, going off the announcement it made last week.

The company expects the final quarter to be weak and result in a full year loss of $6-6.5 million.

Don’t jump to any fast conclusions. I suggest you keep an eye on the stock from here…

Here’s my take. If the stock price manages to hold steady, the stock market is likely suggesting the outlook is improving for the property market.

We can already assume that based on other developments recently. I’ve written about those before.

But there’s rarely a better substitute for the judgement of professional money.

What is the clue exactly? The price action suggests that the market has priced in McGrath’s dismal full year result and is now looking beyond it.

The implication is that perhaps next year’s results will be better.

Take that comment with some caution. McGrath’s announcement came very late Friday.

It’s possible investors need more time to digest the news. Watch the stock further this week.

The main gist is that the question for investors around this stock may be changing.

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Instead of wondering ‘How bad can it get?’, the market might be shifting to: ‘Do you want exposure to the Aussie property market via a real estate agency?’

Business is cyclical by nature. That means sentiment and profits can change. If property is stabilising in Australia, then we should see the related stocks behaving the same way.  

There’s certainly a case to be made for going over McGrath now and making up your mind. I haven’t done enough homework on the stock to say confidently either way.

I do know you’re unlikely to be paying much of a premium considering the smashing the stock has endured. It was over $2 once. It’s under 30 cents now.

That’s a loss of 86% from its peak. You would certainly need patience to consider the idea. It will take time to play out.

But I also want to point out McGrath as a useful contrast to Dacian Gold [ASX:DCN]. This stock has been hammered this month.

It may not be immediately obvious what links the two. They are in completely different industries. But they show the power of market expectations.

Hell hath no fury like this

Look at the shellacking for investors in Dacian Gold since the start of the month…

Source: Optuma

What’s going on?

Dacian revised down its production guidance for the June quarter. It also revised up its costs. That’s a terrible combo.

The market savages any company that doesn’t hit its targets like this. You can expect Dacian to stay in the doghouse for a long time now. Don’t be tempted to go bargain hunting.

The stock is unlikely to come back strongly anytime soon.

It’s going to take time for Dacian to win back trust in the market now. It was only in February the company presented a strong case for its operation. 

That’s part of why the recent selloff was so brutal. Hence why I’m not tempted to jump in.

Here’s an extra kick in the guts for anyone holding the stock. Dacian is a gold miner, tanking when the gold price in Aussie dollars is flying.

As things stand now, Dacian was primed to start raking in money.

You can’t always protect against developments like these. Sometimes glitches hit a mine or management are simply off base.

But you can see how the expectations around the two stocks we’ve gone over today are markedly different.

You have to be very sensitive to these dynamics before you enter any position on the stock market.

It’s part of working out how big and risky your downside might be.

Remember this above all else: Hell hath no fury like disappointed investors.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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