I run, in common with many readers of this website, a semi-automated portfolio of investments that use Stockranks. I also read with interest the ongoing research articles, and in particular the extensive work that Ed shared regarding profit warnings and what to do when a company issues them, linked here https://www.stockopedia.com/co...
But... in trying to incorporate both sets of research into a coherent investment system I run into the following problem. What to do with high Stockrank companies that have also suffered a recent profit warning? Do I buy, sell or ignore?
On the one hand, the Stockrank system has a great track record over multiple years in removing biases that can damage your returns. It doesn't explicitly consider profit warnings at all, though its use of momentum captures investor sentiment about what a profit warning means for a company's long term prospects. As a result, a company that issues a profit warning may well have and retain a high Stockrank. We know that companies with high Stockranks tend to outperform those will lower Stockranks over time, so perhaps it doesn't matter and we should ignore them?
On the other hand, research on this website suggests pretty strongly that the best thing to do with a stock that has issued a profit warning is to sell immediately and go away for at least a year before considering reinvesting. Regardless of the cause and regardless of the sector and company size, profit warnings rarely represent the only piece of bad news and the share price is very likely to drift slowly down or even experience further sharp falls. So, perhaps it really does matter and we should be selling immediately, regardless of Stockrank?
By way of example, consider Indivior (LON:INDV) and Centamin (LON:CEY). Both issued profit warnings in June 2018, albeit for very different reasons, but have had and retain today very high Stockranks. Indivior in particular has experienced a very turbulent existence, with not one but three intraday price falls of more than 20% in the last 3 years. Its a rollercoaster ride to own! Both companies share prices have declined further since the original warning, but both continue to have Stockranks in excess of 80 and will I am sure appear on the screens of investors looking to build a Stockrank based portfolio today.
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