EDITOR’S VIEW Why it can pay to buy more shares if the market overreacts to bad news

Daniel Coatsworth

EDITOR’S VIEW Why it can pay to buy more shares if the market overreacts to bad news

Dr Martens has been around for 75 years so should we worry about a short-term blip?

Overdramatic is the best way to describe the current market reaction to stocks that deliver the slightest bit of bad news. It certainly applies to Dr Martens (DOCS) whose share price fell by 23% in a single day after it guided for lower profit margins and a slowdown in growth for the direct-to-consumer sales channel.

The scale of the share price decline looks overdone. Part of the margin pressure was linked to a strong dollar, yet the currency has started to weaken amid recent signs that inflation is easing in the US and the Federal Reserve will slow the pace of interest rate hikes.

Dr Martens can surely be excused for saying consumer demand is weakening given the difficult backdrop. What really matters to an investor is the long-term potential for the business and on this front everything still looks fine.

A sharp decline in a share price should be treated as a major buying opportunity if the company’s qualities remain attractive. They certainly do for Dr Martens, given its history of strong returns on the money invested in its business.

This is a durable, iconic brand with wide appeal. While it may suffer a few quarters of tougher trading, it’s hard to believe Dr Martens’ business model will be ruined by a recession.

A 55% share price fall year-to-date means considerable bad news is already factored into the company’s valuation. It’s impossible to say with any precision what will happen to Dr Marten’s earnings in the near term. All we know from the market reaction is that investors don’t think it will do very well.

If you’re intending to hold the shares for a long term because you like it as a business, should you care what the market is thinking? Howard Marks, co-chairman of Oaktree Capital, last month wrote: ‘Macro events and the ups and downs of companies’ near-term fortunes are unpredictable and not necessarily indicative of – or relevant to – companies’ long-term prospects. So little attention should be paid to them.’

Someone who has done their research on Dr Martens might conclude that it’s a great business. If the shares go up, the value of their investment increases and they hold on in hope of further gains. If the shares fall, buy more if the investment case hasn’t changed. It’s that simple.

Nick Train, fund manager of Finsbury Growth & Income Trust (FGT), takes a similar view when people worry about Burberry’s (BRBY) position in China and how the country’s zero-Covid policy has restrained sales growth for the fashion retailer.

‘Having exposure to China hasn’t helped in 2022, but so what? Burberry is 170 years old; one year with a bit of Covid shouldn’t make any difference,’ he told me about the company which sits in Finsbury’s portfolio.

The 28% hike in Dr Marten’s latest dividend tells you a lot about the management’s outlook – they wouldn’t be increasing the shareholder reward if life looked glum. Dr Martens was founded 75 years ago and has survived many recessions over that time. It should do so again in the future.