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Valuation and the investment decisionLevel 2Products10 minUpdated

How to follow a company you own

The decision to buy isn't the last decision. A written investment thesis tells you why you own a company, and earnings season tells you whether the rationale still holds. Most of the daily news flow tells you neither.

What you'll learn
  • Why it's worth writing your thesis down
  • What is actually published during earnings season
  • Why guidance weighs more than the reported figures
  • What to follow, and what to leave alone

A thesis is a written rationale

An investment thesis answers three questions: why do I own this company, what do I expect to happen, and what would prove me wrong.

The third point is the most important and the one most often left unwritten. Without it, every fall in the share price can be read as a buying opportunity and every rise as confirmation of your own view.

Why I own it
What makes this company interesting: a competitive advantage, growth, the valuation or some change in the industry?
What I expect
What does the company have to achieve for the investment to work? Write the estimate down in concrete terms.
What would prove me wrong
Which observations would tell you that the assumption doesn't hold? Define these before you buy.

An example thesis

Notice what the thesis does not say. It doesn't say “the share will go up”, and it doesn't set a price target. It describes assumptions about the business that can be tracked and that can turn out to be wrong.

When is a thesis broken?

This is the key distinction: a fall in the share price is not the same thing as a broken thesis.

The thesis is intact
The business is developing as expected, the price moves.
Market sentiment, the interest rate level or the general valuation of the industry changed. The assumptions about the company still hold.
The thesis is broken
The assumption the investment was built on doesn't hold.
The competitive advantage weakened, growth stalled structurally or profitability fell permanently. The rationale is gone.

A written thesis makes this distinction possible. Without one, decisions are easily based on how the share price looks, which is a poor reason in either direction.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.

What is published during earnings season?

  • Reported figures: revenue, earnings and cash flow for the period that has ended.
  • Guidance: the company's own estimate of future developments. Often the most important part of the release.
  • Management's comments: explanations, priorities and an assessment of the market situation.
  • Order backlog and other metrics: industry-specific forward-looking figures.

Guidance weighs more than the reported figures

Reported earnings tell you about the past. Guidance tells you about the future, and because a share's value is based on future earnings, a change in guidance often moves the share price more than the figures for the period that has ended.

Guidance raised
The company expects things to develop better than before. This typically raises expectations for the whole future earnings path.
Guidance cut
The coming years are expected to be weaker. The impact can be many times greater than a disappointment in a single period.
Guidance withdrawn
The company says it can't estimate the future. The increased uncertainty typically shows up quickly in the price.

What to follow, and what not to

The business
Revenue development, profitability, return on capital, indebtedness and changes in guidance.
The thesis
Do the assumptions your holding was built on still hold? This is the real purpose of following a company.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.

Check question
Test yourself: following a company and your thesis
Four questions.
Kysymys 1 / 4
What is the most important, and most often missing, part of an investment thesis?
Kysymys 2 / 4
The share has fallen 25%, but the company's business is developing as expected. What does this tell you about the thesis?
Kysymys 3 / 4
What does the share price reaction to an earnings release tell you about?
Kysymys 4 / 4
Why does guidance often move the share price more than reported earnings?
Score: 0 / 4

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