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How should we “play” hot stocks?

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Question asked 08/10/2022

How should we “play” hot stocks?

Hi James, When I look at the trading pattern of many “hot stocks”, there a rush up, a peak and then a long fallout. It seems brokers and tip sheets get smitten with the spiralling uptrend but forget the inevitable reprice. Stocks like Appen -75%, Magellan Financial -50%, Aussie Broadband -50%, Domino Pizza -55%. My question is given the volatility in hot stocks, why bother? Forget about buying the latest “tip”. Why not look for something out of favour with solid long term fundamentals? Interesting to reflect Whitehaven +300% and Woodside Energy +58%. Time to take profit? You can never pick the market top. Lindsay C

Answer

Hi Lindsay,

You make some very valid observations and its one of the reasons we’ve stayed well clear of the crypto space which has hurt a number of speculators / investors alike over the last year. Conversely we took what looked like a great profit from our position in Whitehaven Coal (WHC) earlier in the year only to see it rally ever higher i.e. in this case the top was much higher than we expected!

Hence we often adopt a scale both in and out approach to positions buying weakness with a pre-laid out plan to average at lower levels e.g. Seek (SEK) and REA Group (REA) and reducing strong positions into target areas as we did in August with a number of our holdings e.g. Goodman Group (GMG), Macquarie Group (MQG), Xero (XRO) and ResMed (RMD).

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Woodside Energy Group (WDS)

LAST UPDATED 07/10/2022 12:29

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