Buying on the Dips for the Risk Averse

Fiscal Year 2022 saw the ASX All Ordinaries Index (XAO) post its worst performance in a decade – dropping 11%, with a majority of the blood spilling into the streets occurring in the second half of the fiscal year.

A veritable perfect storm of events have taken place, from COVID 19 variants to subsequent supply chain disruptions to the Russia/Ukraine war to inflation to interest rate hikes.

Right now it appears the primary source of investor concern has shifted from inflation to its supposed cure – rising interest rates. As central banks around the world raise interest rates the worries are now focused on the potential for the rising rates plunging the world into economic recession.

In this environment markets do not lack for investors to employ a time-honored strategy of “buying on the dips.”

The strategy is relatively simple – when a stock’s price falls substantially, investors both long and short term may step in hoping for a rebound in the price. Buying on the dip differs somewhat from the buy low sell high adage, in that long term investors might continue to buy a preferred stock as the price continues to “dip.”

Short term investors anticipate a quick rebound at which point they will sell at a profit. Long term investors are willing to wait.

Both the long and short term approaches to buying on the dip rest on the same assumption – the stock price will recover.

In its execution, buying on the dip is fraught with risks, with some market experts strongly critical of the approach.

First, in both the long and short term use, the strategy is essentially an attempt to time the market, which is universally recognised as not possible. A stock hitting a 52 week low can continue to drop.

For the long term investor, willingness to wait alone is a risky proposition as the stock may be falling for reasons other than a general market or specific sector downturn.

Rather than blindly rushing in to a stock that is down, investors need to assess the likelihood of the stock price resurrecting.

Investors skilled in technical analysis sometimes rely on “price waves” as explained in Elliot Wave Theory.

For fundamentalists, the issue is has the investment thesis for the original purchase changed. Are there new competitors grabbing market share? Is demand for whatever the company produces diminishing? Have there been substantial changes in company management?

While conventional wisdom tells us past performance is not an indicator of future performance, common sense suggests as long as the case for investing in the stock remains intact, a minimum of five years of performance history is a place to look for some safety.

Another place to look to gauge future potential is analyst opinion. Earnings and dividend growth forecasts are available on some financial websites.

Some sectors also provide a place to look. For example, consumer discretionary stocks are susceptible to lower demand in recessionary times and information technology stocks are sensitive to higher interest rates.

Information technology was the worst performing sector in the ASX in FY 2022, down 39%; followed by consumer discretionary, down 23%.

The daily lists of ASX stocks hitting 52 week lows represents a treasure trove of opportunity for buy on the dip proponents.

For the trading week beginning on 5 September, six stocks of interest hit 52 week lows. Two were mining stocks – Ramelius Resources (RMS) and Silver Lake Resources (SLR). Two were in consumer services and retailing – City Chic Collective (CCX) and Domino’s Pizza (DMP). Two were in information technology – Codan Limited (CDA) and Next DC (NXT).

The following table includes historical performance and future growth metrics for the six companies.

Ramelius and Silver Lake are gold miners and both saw some weakening in financial performance in FY 2022.

Ramelius posted revenues of $603 million dollars in FY 2022, down from $634 million in FY 2021, but net profit collapsed from $126 million dollars to $12 million.

Silver Lake fared better, with revenues increasing from $598 million dollars in FY 2021 to $634 million in FY2022, while net profit dropped from $98 million dollars to $77 million.

Adding to the woes for Ramelius shareholders was the 16% increase in the company’s All in Sustaining Costs (ASIC), rising 16% to AUD$1,523 per ounce with a gloomy 2023 estimate of ASIC at between AUD$1,750 and AUD$1,950 per ounce.

Ramelius has six operating gold mines in Western Australia, with the latest addition being the Lake Rebecca Gold Project, acquired along with Apollo Consolidated, the sole owner. Mt. Magnet is the flagship mine for Ramelius, accompanied by the Marda Mine; the Edna May mine (acquired from Evolution Mining in 2017); the Tampia mine; and the Vivien gold mine. Ramelius has exploration projects underway at Mt. Magnet, Edna May, and Rebecca Lake, as well as a development projects at the Penny gold mine, acquired in 2020, and the and Galaxy mine.

In its FY 2022 Financial Results Presentation, the company expressed optimism for FY 2023, citing its strong balance sheet and the commencement of production from the Penny and Galaxy projects.

Silver Lake has two operating gold mines in Western Australia – Mount Monger and Deflector, served by a Silver Lake processing operation. On 22 January of 2022, an Ontario Canada court approved Silver Lake’s bid to acquire the assets of Harte Gold Corporation, including the Sugar Zone Gold Mine, with land assets extending into the Northern Ontario gold mining region.

With the addition of a third producing asset, Silver Lake upgraded its FY 2023 sales guidance by 8%. Exploration efforts in the land surrounding the Sugar Zone Mine are underway, Over FY 2023 and FY 2024 the company is targeting $35 to $45 million dollars towards capital improvements in operational facilities and infrastructure.

The challenge facing both Ramelius and Silver Lake remains rising costs in the face of volatile pricing. The following price movement chart is from goldprice.org:

City Chic Collective caters to the higher end fashion needs of plus-sized women via a multi-channel operation, with more than 94 brick and mortar stores here and in New Zealand along with an online presence here and in the US and the UK.

The company offers five branded fashion lines – Avenue; City Chic; Evans; and Hips and Curves Body.

The company’s share price plunged into free fall following the release of Half Year 2022 Financial Results back on 24 February. Sales revenue rose 49%, with a healthy boost from a 62% increase in US sales, helping to offset COVID related store closures here in Australia. Statutory net profit declined by 5.9%.

Investors chose to ignore the rising growth in the company’s US operations, focusing instead on management commentary on the continuation of challenging conditions. Dividend payments were eliminated in the interest of preserving cash for potential acquisitions and inventory buildup. The company announced the inventory buildup would continue for the remainder of the year.

City Chic’s Full Year 2022 Financial results were solid enough, although far from spectacular. Revenues rose 39% and statutory net profit rose 4.7%. Revenues in Australia and New Zealand rose 11%, while US sales continued to expand, up 53.9% along with a 34% increase in website traffic and a 54% customer increase.

The problems were two fold and interrelated – depleting cash flow from inventory investments. The company justified this decision citing supply chain issues continuing in FY 2023, making inventory procurement challenging.

Some investors may have been reminded that it was an inventory imbalance that crushed former market darling Kogan (KGN).

Domino’s Pizza provides a stellar example of looking to a company’s growth plans. The company’s Full Year 2022 Financial Results were lackluster at best, with a 4.6% revenue increase in store network sales and a 4.4% increase in online sales. Underlying net profit fell 12.5%.

Like many other companies Domino’s was hurt by COVID 19 store closures and supply chain disruptions, yet in the midst of this the company refused to alter its aggressive growth plans.

In September of 2021, the company added Taiwan to its global footprint, increasing its store count by 127. In the Half Year 2022 Results Presentation Domino’s announced it was continuing its goal of opening a mix of franchise and corporate outlets by 500 through FY 2022, a commitment reinforced in the Full Year Results presentation.

In addition, the company has focused on new menu offerings, delivery options, and improving operating efficiencies.

In late August of 2022, the Domino’s announced it was acquiring three new market territories – Malaysia, Singapore, and Cambodia – from privately owned Impress Foods, an increase of an additional 287 corporately owned stores.

Codan is a somewhat surprising victim of the tech massacre, given the company’s customer base and its most recent financial results. Despite suffering from the same COVID 19 induced challenges facing multiple other companies, Codan managed to post both revenue and net profit increases in FY 2021 and FY 2022.

The Full Year 2023 Financial Results showed a 16% increase in group sales and a record profit of $100.5 million dollars, up 3%. Investors were rewarded with a 4% increase in dividend payments over FY 2021. Management claims despite supply chain challenges the company managed to maintain timely product delivery. The share price fell, as investors may have focused on the commentary that “challenging conditions” are likely to continue.

Codan is a high-tech provider of electronic solutions, primarily in metal detection and communication, with products sold in more than 150 countries around the world. The company’s global footprint is massive, with employees located here in Australia and in the US, the UK, the UAE, Canada Mexico, Brazil, Denmark, Ireland, and Singapore.

Codan produces a wide array of metal detection equipment for consumer treasure hunters as well as for military use in mine detection.

The company’s other business operation is communications devices. Codan’s Domo Tactical Communications (DTC) radio solutions provide the kind of wireless transmission of data and video required by the military, intelligence agencies, border control agents, and first responders.

Zetron is the company’s other main revenue generating source, offering both land-based and mobile critical mission radio communications for customers in government, public safety, transportation, healthcare, utilities, and natural resource agencies and academic institutions.

In FY 2022 Codan invested $40 million dollars in its existing businesses, as well as new products in development, with some ready for launch in FY 2023.

According to Yahoo Finance Australia the company has two analysts covering the company, both with STRONG BUY ratings in July and August.

NEXTDC is another analyst favorite, with four analysts with STRONG BUY recommendations and six with BUY recommendations in both July and August.

The company builds and operates data centres with customers ranging from the likes of Woolworths (WOW) to small and medium sized business enterprises. The company has nine data centres throughout Australia, with supporting ecosystem of partner companies comprising of 750 digital specialists, cloud providers, and ICT (information and communications technology) services providers..

The company grew revenue from $246 million dollars in FY 2021 to $291 million in FY 2022 while reversing an FY 2021 loss of $23.6 million dollars to post a profit of $9.1 million. NEXTDC issued strong FY2023 guidance, forecasting the company’s data centre services to increase between 17% and 22% with underlying EBITDA (earnings before interest taxes depreciation and amortisation) to increase between 12% and 17%.