The Market Fell. Richie Calls It a Bargain.
A stock has dropped 15%, and Richie is ready to buy. Tigger has one question: has the price fallen faster than the business, or have the earnings prospects become worse?
| Tigger The Analyst Follows earnings, valuations, policy details and what the market may already have priced in. |
| Richie The Investor Looks for practical opportunities and asks the question many readers are thinking: “So, should I buy?” |
The Situation
Richie is scrolling through his watchlist when a familiar stock catches his eye. Last month it traded at RM5.00. Now it is RM4.25, a 15% decline. The company is still operating. To Richie, the lower price looks like a sale.
He remembers the name, not the latest earnings. His finger is already hovering over the buy button. Tigger notices that Richie has compared two share prices, but not the company behind them.
Richie’s Question
| Richie asks “It was RM5.00 and now it’s RM4.25. Same company, 15% cheaper. Isn’t that a bargain?” |
Tigger Breaks It Down
| Tigger “Maybe. But what exactly became cheaper: the share price or the value of the business? A falling stock can be an opportunity, or a warning that investors expect lower profits.” |
Richie “But if I buy now and it goes back to RM5.00, that’s a 17.6% gain!” | |
| Tigger “Your maths is right, before fees. Your assumption is the problem. The old price is not a promise of where the stock will return. First, we need to see what happened to earnings.” |
Tigger Runs the Numbers
Let’s use a fictional Bursa-listed company to see why the same RM4.25 share price can tell three very different stories. These are illustrative numbers, not market quotations.
| Scenario | Share price | Expected EPS | Price ÷ EPS | What it means |
|---|---|---|---|---|
| Before the fall | RM5.00 | RM0.25 | 20.0× | Reference point, not a fair-value target |
| A: Earnings hold up | RM4.25 | RM0.25 | 17.0× | Lower multiple if profits remain stable |
| B: Earnings weaken | RM4.25 | RM0.17 | 25.0× | More expensive relative to reduced earnings |
| C: Earnings improve | RM4.25 | RM0.30 | 14.2× | Potentially more attractive, but forecasts still need proof |
Richie “Hold on. At RM4.25, the stock could be on 17 times earnings or 25 times earnings, depending on what happens to profits?” | |
| Tigger “Exactly. A 15% price drop is visible immediately. A 32% cut in expected earnings may be less obvious. We also need to review debt, cash flow, margins and why investors are selling.” |
Cheap is a valuation judgement, not a price movement. Compare current expectations, balance-sheet risk and the reason for the sell-off before calling it undervalued.
I’m not buying just because the chart is red. I’ll read the latest results, check whether earnings forecasts have changed and set a price I can defend.
Decision: Wait and verifyThe Ledger Asia Insights
The market does not owe a stock its old price. Buying after a fall can work when fear drives the share price below a resilient business’s worth. It can fail when falling earnings or rising debt mean the business itself is worth less. Before asking how far the stock has fallen, ask what has changed since it traded higher.
Your Move
A fictional stock falls to RM4.25. The company’s expected annual earnings per share are revised down to RM0.17. What is its new P/E ratio?
Hint: P/E = Share price ÷ Earnings per share
Tigger and Richie are fictional characters created by The Ledger Asia. All share prices and expected earnings figures in this episode are hypothetical and illustrate forward P/E (price divided by forecast EPS), not actual Bursa Malaysia quotes. Forecast earnings can change. P/E alone does not determine fair value. This article provides general education and commentary, not personalised investment advice or a recommendation to buy or sell securities.
