Be wary of companies trading at high multiples

Following Bellamy’s 43% one-day fall earlier this month, it’s worth revisiting comments recently made by our Managing Director, Charles Leyland, in an interview with Livewire: “It was faddish, it’s come off a bit. We saw after the dot-com boom that stocks that fell in half, they kept falling. If you go trying to catch a falling knife, you could lose more money.” When things go bad with high-priced stocks the fall is leveraged; not only does the share price fall due to a fall in earnings, the inevitable p/e de-rating causes a movement many times that of the underlying movement in earnings. Another issue with companies selling into China is that often have an (effective) single customer risk which needs to be considered. Watch the video here: