Question from a reader

by admin on January 22, 2013

What to do with a “problem” like テクノマセマティカル  (3787)?  I got a question from a reader about Techno Mathematical, a stock I mentioned in an earlier post, and which has now become my largest Japanese stock holding.

The “problem” is what to do when a stock pops 12% or so on one day and then another 12% or so today.

The answer is very simple, and goes back to what I was saying about holding your position. The way to determine whether to sell is to judge the situation against your original thesis. And, you may need to reexamine the thesis and update it.

The original thesis with Techno Mathematical was that it was turning profit-making. Now, based on forecast FY13 numbers it is currently about 20x forward earnings. The questions are 1. how much can it grow in the following year, and 2. what is the right multiple for those earnings.

The truth is that it is very hard to know how much it can earn in FY2014, but what is pretty certain is that if it is getting in the black in FY13, then FY14 will be better because of stickiness of its contracts and new features. However, what is more important to know is that this kind of repricing tends to overshoot as the market discovers the new “growth story”, and 20x FY13 gets viewed as a lower multiple of FY14, which, if you consider growth, is not that high (they say).

Now, personally, I would not buy into a story based on that kind of logic, but it is far easier to ride a moving train than to board one. Is this reliance on the greater fool theory? Perhaps you could argue that, but it is more a reliance on an observation of what happens when there is a “state shift” in the market.

Essentially what I am saying here is do not lose your position (again).

Other stocks which this may apply to: West Holdings (growth through new business model) and Arrk (turnaround story, will go profitable soon).

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