You never go broke taking a profit, at least according to the well hackneyed stock broker saying. That may be true, but if you cashed in any gains from any of the ASX tech stock high-flyers a year or so ago, that advice has almost certainly seen you miss out on truly life changing returns.
You know the ones; the so-called WAAX stocks:
WiseTech (ASX:WTC) shares and Altium (ASX:ALU) shares have delivered gains of ~140% to shareholders over the past 12 months. Afterpay (ASX:APT) shares have roughly doubled that, while Xero (ASX:XRO) shares almost seem disappointing with ‘only’ a 76% return to shareholders over the same period.
Hindsight is, of course, twenty-twenty. The fact is that these companies — impressive though they all are — were already trading at eye-watering valuations a year ago. It wasn’t necessarily reckless to take some money off the table, especially given most shareholders were already sitting on substantial gains at that point.
The question now, though, for those lucky enough to have held on, is whether it’s time to cash in. Or, indeed, whether those that have been watching with envy from the sidelines should bite the bullet and join the party.
As usual, the answer is; it depends.
The reason these ASX tech shares are trading at such lofty valuations is that the underlying businesses are all delivering incredible growth, and all have plenty of room to run. Consensus guidance suggests, for example, that Wisetech will continue to grow per share earnings at more than 40% per annum over the next three years.
So while Wisetech shares may seem expensive relative to last year’s earnings — which puts the company on a price-to-earnings, or PE, of 148 — the massive growth expected will see that multiple drop significantly in the years ahead.
Sure, Wisetech shares could drop lower in the interim; after all, the market never moves in a straight line.
In fact, the Afterpay share price is presently down about 26% from its recent high, and it has seen more than a few double-digit drawdowns over the years. To date, it’s been a case of one step backwards, ten steps forward! Those that fretted over every dip and sold have made terrible mistakes.
So, if you are a genuine believer in the long-term growth potential of these businesses…
If you’re able to stomach the ups and downs of the market…
And if you have the patience to wait for their potential to be realised, then holding firm is entirely justifiable.
Just don’t expect it to be smooth sailing.
Andrew Page is the founder of Strawman.com, a platform that provides research and recommendations from Australia’s best private investors. Andrew does not hold interests in any of the shares mentioned.