One of investing’s hardest questions is how to tell the difference between a dip (which wise investors ride out) and a company that has truly lost its value (in which case it’s probably time to sell). We often preach the wisdom of holding, and even buying, stocks during a dip. But how can you tell?
Paul Price examined this question recently on Real Money as he reviewed his own portfolio. “Nobody likes to buy shares, only to see them go lower soon afterward. It insults your sense of pride, while denting your portfolio value. That's exactly what happened to me after buying shares of Heartland Express (HTLD) - Get Heartland Express, Inc. Report last month around $16.50. As of Sept. 17, 2021 the same shares could be had for just $15.96.”
This is the textbook example of a worrying dip. A change of $0.54 isn’t the end of the world, but in the context of a stock worth $16.50 it’s significant enough to maybe indicate more than just trading day jitters.
When that happens, Price recommends that investors look to their fundamentals. The difference between a dip and lost value ultimately comes down to the strength of the underlying company. Did your investment lose value because the company itself has grown weaker? With Heartland Express, Price takes a careful look at his investment.
“There were three new pieces of information available since I wrote about HTLD in August. All of those were positive items.
1. Management announced an additional 3 million share buyback authorization to go along with a previously announced 3.745 million share authorization. Together those repurchases would represent almost 4.7% of total shares outstanding if fully carried out.
2. A special dividend of 50 cents per share was declared and has already gone ex-dividend along with the normal quarterly payout of 2 cents per share.
3. Pricing power, combined with strong demand for trucking services, led to an increase in this year's EPS estimate from 95-cents to $1.00.
Did any of those items justify a drop in the already cheap share price? The special dividend accounted for half a dollar of the total 53 cent dip (from $16.49 to $15.96). In essence the stock is pretty much unchanged from my recommended price, although HTLD did rise as high as $17.45 on Aug. 30 just before going ex-dividend for 52 cents in total.”
The upshot? With Heartland Express the stock price may have dipped, but the company itself still seems quite strong.