It's natural to flinch when ripping off a Band-Aid, even when you know the pain is coming. Savvy investors, however, realize that it's sometimes a necessary step in the healing process.
Such is the case at Great Wall Motor Co., whose shares plunged as much as 7.1 percent on Monday after disappointing first-half results. Investors were stung by a 50 percent drop in profit from the year before, plus a 1 percent dip in revenue.
They should have been braced for the impact.
China's largest seller of sports utility vehicles has also outlined plans to boost advertising and promotions to get the word out about the new cars, while increased R&D costs dented the company's bottom line.
It's likely the pain will continue for the rest of 2017 as discounts erode profits and revenue lags. But all that effort could eventually have a positive effect, making Great Wall relevant again.
So long as consumers like the new WEY VV7, which has already delivered 3,000 units and has a two-month waiting list, the tide should turn for Great Wall's sales. Internally, the company has set a target of 2 million SUVs by 2020, almost double the number it sold last year.
While that may be ambitious, any sort of upswing in revenue will help embolden Great Wall bulls -- especially since the most recent share-price weakness is prompting some analysts to wind back their estimates. At least three have downgraded the stock over the past four days, while eight have revised down their 2017 earnings expectations.
Great Wall bears are pulling their chips off the table. Short interest as a percentage of free float now stands at 10.9 percent, down from a five-year high of 16 percent at the end of May that made the company the most-shorted stock among 2,000 Hong Kong publicly traded firms, according to Markit.
As shares in Geely Automobile Holdings Ltd. head north, investors searching for another Chinese carmaker might want to consider shifting gears. Great Wall's stock is trading at 7.6 times forward earnings, compared with Geely's 14.8 multiple.
Great Wall's grazes will heal over time, and short-term pain always fades.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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