our five-year ownership period. In fact, the stock
declined by 22% over 18 months following our initial
recommendation before going on to double the next
year. Investors need to develop the patience to see
these periods through.
The second major decline was – tellingly – after Trade
Me had doubled. Between our downgrade to “hold” in
September 2016 to November 2017 the stock fell 30%
to $3.90, at which point we suggested buying more.
There was an air of bad news about Trade Me through
this period, with concerns that Amazon and Facebook
were about to take a chunk out of its Marketplace
business. This is how good opportunities in quality
companies come about.
Trade Me was exactly the type of buying oppor-
tunity we love at Intelligent Investor: a high-quality,
cash-generative business trading at a reasonable
price. It’s noteworthy that better buying opportuni-
ties appeared after the initial upgrade, showing that
patience and a staggered entry often pay off.
We were sorry to see Trade Me leave the ASX in May
but that’s sometimes the lot of the small shareholder.
We’re now on the lookout for the next opportunity.James Greenhalgh is a senior analyst at Intelligent Investor.tunities. Trade Me was an example; it’s just a shame it
was snatched away before that growth came through.3
“High” multiples are just fine
Trade Me traded on a price-earnings ratio of
20 or above for most of the time we recommended
it. This is a perfectly rational and, indeed, a typical
multiple for a high-quality, cash-generative business.
That Apax paid 25 times earnings indicates its belief
in the company’s potential under new management.
Of course, it’s better still when high-quality stocks
decline to a PE of 16, as Trade Me did briefly in 2015,
but such periods tend to be fleeting. You’ll improve
returns waiting for similar opportunities but you’ll
also miss plenty being so picky. While many value
investors struggle to pay PE ratios of 20 or above for
high-quality stocks, it’s often sensible to do so.4
Don’t worry about price falls
Trade Me shows how a stock can end up produc-
ing impressive returns despite regular and sustained
price declines. Ignoring falling prices is necessary
to become a successful investor; and if you can train
yourself to buy when bad news hits, all the better.
Trade Me’s share price had two major declines overIf you
can train
yourself to
buy when
bad news
hits, all
the better