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Generally speaking, great companies rarely go on sale. And this is why it can pay to take advantage of any temporary share price weakness. This week, we’ve seen just that in what may be considered a high-quality growth share from the FTSE 100.
It’s left me wondering whether I should be raiding the back of the sofa and snapping up what I can, while I can.
What crisis?
The stock in question is automotive marketplace platform provider Auto Trader (LSE: AUTO). Despite releasing the sort of full-year numbers most companies would crave yesterday (29 May), its share price has retreated by no less than 12% as I type.
At first glance, this seems rather harsh. After all, revenue rose to £601.1m, up by 5% from £570.9m in the previous financial year. The average revenue per retailer — a key metric for the company — rose by the same percentage. Operating profit accelerated 8% higher to a smidgen under £377m. What gives?
Like so many things when it comes to investing, it’s not about what happened; it’s about what people were expecting to happen. In this example, analysts were anticipating that revenue would come in just above £606m.
Holders also seemed to be unnerved by management’s projections for FY26. Retailer revenue growth of 5% and 7% is expected. Again, this appears to be less than some analysts were hoping for.
Lagging the index
Despite a strong 2025 prior to results being announced, Thursday’s drop leaves Auto Trader slightly down for the year. To compound owners’ misery, the company has now delivered a worse return over the last five years than the FTSE 100 index. And that’s before I’ve factored in dividends!
There’s no rule to say that Auto Trader’s price won’t continue falling either. This is very possible if the company’s prediction that growth will be stronger in the second half of FY26 proves to be wide of the mark.
We also need to consider the valuation. A price-to-earnings (P/E) ratio of 22 is more reasonable than it was. However, it’s still far from ‘cheap’ in the conventional sense.
Still a great company
But I’ll tell you something: I didn’t see any indication that Auto Trader’s dominant position is under any threat. It remains 10 times larger than its nearest competitor. That’s a strong economic moat if I ever saw one!
Look under the bonnet and there’s also still a lot to like. Operating margins and returns on capital employed (essentially, what a company gets out from the money it puts in) both remain staggeringly high. They’ve been that way for years. And this helps to explain why the company has vastly outperformed the FTSE 100 since listing in 2015.
This is why taking a long-term approach to holding shares is so Foolish.
Time to step in?
For complete transparency, I once held a slice of Auto Trader in my Stocks and Shares ISA. I seem to remember making some good money when selling up but experience has since taught me that I was likely snatching at profit. I would probably have done better to stay put.
Taking into account this week’s sell-off, I’m considering buying back in next month. If we then see a further sell-off, I’m backing up the truck!
