Harness uncertainty to make your portfolio fly

Did your fear of flying stop you buying these two Intelligent Investor upgrades? 

What do Flight Centre (ASX: FLT) and Sydney Airport (ASX: SYD) have in common? Apart from the possibility you might visit the latter after you’ve booked a flight with the former.

Well, both stocks were upgraded to Buys by Intelligent Investor in the past six months or so. Since the upgrades, the share prices of both Sydney Airport and Flight Centre have risen by more than 25%. With gains like that it’s no surprise the value on offer has disappeared; both have since been downgraded to Hold.

Before proceeding, a caveat. While fast capital gains are of course welcome, it’s too early to declare either recommendation successful. We’ll need a few more years before making that call.

Considerable uncertainty

But a common theme runs through both upgrades – Sydney Airport and Flight Centre were subject to considerable uncertainty at the time they became Buys. And plenty of members were negative on each stock in the comments sections of their reviews.

Colleague Graham Witcomb upgraded Sydney Airport to Buy at $5.89 in Who pays for Sydney’s second airport?. The key uncertainty here was exactly as the headline indicated: there were market concerns that Sydney Airport might exercise its first right of refusal to develop Badgerys Creek. But there were plenty of clues that it wouldn’t – management had already called the new airport a ‘challenging investment proposition’.

I upgraded Flight Centre to Buy at $30.94 in Flight Centre’s ticket to ride a few months before Graham’s Sydney Airport research. I followed up with several reviews over subsequent months to reinforce the idea, including Flight Centre gloom is just the ticket and Is Flight Centre the next JB Hi-Fi?. Research director James Carlisle covered the interim result for me in Flight Centre: Interim result 2017 while I was busy researching iSentia (ASX: ISD) (oops).

Negative comments

With Flight Centre the uncertainties were even worse than for Sydney Airport. After five profit downgrades, we flagged a possible sixth one (which then occurred). Airfares were plummeting, and there were the usual concerns about how Flight Centre’s online and non-online competitors were threatening its business. The comments on the four articles were generally pretty negative.

I can’t help wondering if some members miss opportunities like Sydney Airport and Flight Centre because they’re making a fundamental mistake. Unless you’re training yourself to buy during these periods – including on bad news – you might be handicapping your performance.

Unfortunately the comments sections of our reviews can sometimes reinforce the negativity surrounding a stock, just like the media can. Head back to the Sydney Airport and Flight Centre reviews mentioned above to see what I mean.

Of course, this doesn’t mean you should follow our recommendations slavishly. We’re not always right. You also need to be comfortable with a business and, if you’re not, you’re not. There are in fact plenty of Intelligent Investor recommendations that don’t make it through my personal investment filters (usually small companies, as they’re too risky for the family portfolios I manage).

Value investing heaven

Also, there are many ways to value investing heaven. Other approaches might work for you, but you should at least think about whether you’re subconsciously falling into psychological traps when the news flow is negative.

My personal road to investing heaven is paved with negative ASX announcements. I very rarely buy (or recommend) a stock unless there is bad news (or the threat of it). I’ve bought Seek (ASX), Crown (ASX: CWN), Computershare (ASX: CPU), Navitas (ASX: NVT) (and yes, iSentia) within days of their bad news over the past two years.

So did I buy Flight Centre?

Somewhat ironically, I didn’t. I had an order that wasn’t filled last year, mainly because I only ever place limit orders and Flight Centre’s volatility worked against me. Then in February, when the sixth profit downgrade hit, it was reporting season and I was too busy covering company results for members.

I’m now so conditioned to buy on bad news that I sometimes find it difficult to buy stocks otherwise (maybe I need to work on my own biases!). But harnessing that ‘oh no’ feeling in the pit of your stomach can be surprisingly profitable. So how do you respond to uncertainty?

Disclosure: The author owns Sydney Airport, Seek, Crown, Computershare and Navitas.

Related Articles