HEADLAM

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15th Mar '18 by Prof Calculus

14 comments 3662 reads

I have held this quality company for a while , still hold and may top up if I have the courage !!

Does anyone know why the share price has fallen so much -the last results did not seem to bad .
I see Ruffer have added a small amount to their holdings any thoughts anyone ?

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About the Author

Prof Calculus

Premium Member

14 comments

aflash

15th Mar '18

HEAD (Headlam) is dropping on heavy volume. Someone knows something.

Daily volume is not sufficient to make Technical Analysis all that accurate but it helps.

When the results came out on 6 March a lot of people here thought they were OK.
Stokopedia computers like the company and so does another data base I use.
Grahm/Paul have given thumbs up.
Therefore I opened a position for the first time. Since then the price has continued to drop.
I knew it was a risk but here are my arguments:

Technical:-
At the LO of 461p there was support in 2016, 2015 & 2014.
Below that at 408p in 2013. Brexit dropped the price there in 2016.
From there it took off and arguably became overpriced by May 2017.

The Fibonacci retracements from the HI to the LO do not help much because it found no support at any of them. Quite possibly taking a less 'artificial' LO would give better results but why should I bother? No one here believes in them.

RSI is 15 meaning the stock is exceptionally Oversold.
However there is no divergence on the Stochastics oscillator yet. (look it up).

On the Fundamental side there is an ex-div date on 31 May which will provide yield support.

If it drops to 410ish before then I shall add.

JamesrWilson1989

15th Mar '18

Fairly simple this one:

From the report "Against a very strong January 2017 comparator, the Company's overall like-for-like revenue* declined 5.9% in January 2018, with the UK showing a more pronounced reduction, 6.7%, predominantly due to the performance of the residential sector and the adverse impact of a reduction of orders from one of our larger customers. In contrast, Continental Europe delivered a strongly positive result for the residential sector in the month, 6.5% on a like-for-like revenue* basis. The negative UK performance in the month was largely attributable to a very soft first working week following the New Year holiday, with the rest of the month showing some recovery but remaining moderately below our expectations.

Therefore, lots of people are potentially expecting a profit warning in the coming couple of months unless things improve.

Julian Rowe

15th Mar '18

Tony, I too hold this stock. It is currently 'tanking' despite reporting profits in excess of £700m (up 2%). I've not idea, but here are a few possibilities:

I know 'Investment 'Whale' Blackrock (with a strong US focus) is steadily reducing its position, though Ruffer LLP is not. With the absence of strong demand, this might well have the effect of downward pressure on price. If this were so, then my hope is that this lower price may be more in the short term.

However, Headlam has an Beneish M-Score of -1.20. As the score is above the -1.78 threshold, this indicates a potential risk that the company may be manipulating earnings. The exact Beneish threshold varies depending on the relative error costs of missing out potential manipulators versus mis-classifying a non-manipulator (Type 1 vs. Type II). A -1.78 threshold implies a 13.8% chance of mis-classifying a non-manipulator, which Beneish suggests is a reasonable compromise level. In Headlam's case, the switch is on, & Beneish's research implies a ~86% probability that the firm is manipulating earnings.

Its CFO is ex KPMG. Mr. Chris Payne since September 13, 2017. Mr. Payne joined Headlam Group plc from Biffa plc & I tend to support businesses with solid Finance heads. BIFFA is currently experiencing a similar fate to Headlam despite being much larger.

Headlam's stock has steadily fallen in price over the past year (nearly -30%) but it did recover. The recent fall of -22% could be for a couple of reasons. Carpetright has nosedived nearly 90% from a mid 2015 peak, a fellow floor coverings co. Headlam supplies independent retailers with flooring products who presumably sell to similar consumers to Carpetright? It might also be the result of recent activity by some experienced hedge funds, deliberately shorting the stock, on the look out for smaller Mid Caps and larger Small caps which may be more vulnerable in these volatile market conditions?

The price has returned to levels not seen since BREXIT vote. Headlam reports that its European operations are holding up well, but the UK side is not - almost break even. Could this be a cause of investor 'jitters'. The stock has increased its negative risk profile....

Is 400p a level at which Headlam will find support? In a 5 year timeframe the trend has been up. Only recently has it now has it fallen below the 50 SMA (5yr chart).

I am an amateur investor, and my opinion is HODL. My position is relatively modest (510 shares). I have had considerably less good fortune in the past 12 months with BT & Centrica where my positions have been considerably greater, so my track record is not the best. I am sure there are wiser and more experienced Stockopedia investors who can give better qualified feedback. I think quite a few sell when a stock SR<80, and HEAD SR=70.

Prof Calculus

15th Mar '18

Thanks to everyone for your feedback its really helpfull

jonno

15th Mar '18

Hi Tony
I take a similar view to James in that like for like UK like sales in January and February were poor and there is likely an expectation of a profit warning. This is despite the company's assertion that it expects at present, to deliver results in line with full year expectations. A bold statement given that we are not quite three months into Headlam's financial year.

Having said that the Company appears to be doing the right things in terms of geographical and product diversification together with a host of self help measures. Regarding the former I think that a significant European purchase would help sentiment. It is financially sound and in my view well managed. It is trading well below its historic PE and on a cash adjusted basis even more so.

The next scheduled update is likely to be at the AGM in late May. I hold Headlam and will continue to do so although the share price decline is disconcerting.

Good luck

Jonno

Prof Calculus

16th Mar '18

Yes I topped up today (very small amount ) dividend is looking good at 6% 1.5 x covered .

No doubt share price will fall further tomorrow !!

Luthrin

16th Mar '18

"However, Headlam has an Beneish M-Score of -1.20. As the score is above the -1.78 threshold, this indicates a potential risk that the company may be manipulating earnings. The exact Beneish threshold varies depending on the relative error costs of missing out potential manipulators versus mis-classifying a non-manipulator (Type 1 vs. Type II). A -1.78 threshold implies a 13.8% chance of mis-classifying a non-manipulator, which Beneish suggests is a reasonable compromise level. In Headlam's case, the switch is on, & Beneish's research implies a ~86% probability that the firm is manipulating earnings."

I'd caution against giving any credence to Stockopedia's Earnings Manipulation Risk flag without further investigation.

In this particular case, the first red-flagged ratio (Days Sales in Receivables Index) has been incorrectly calculated due to a bug in Stockopedia's data handling, and the second one (Asset Quality Index) is primarily due to the increase in intangibles from Headlam's acquisition of Domus Group (Professor Beneish specifically noted in his 1999 paper that the acquisition of goodwill could influence this metric and so he also tested AQI using the ratio of non-current assets other than PPE and goodwill).

This measure inevitably reflects on the integrity of management, and if I were the CFO of Headlam I'd be very unhappy at the potentially misleading impression given by Stocko's number crunching in this instance.

ls2g08

16th Mar '18

I sold out as the price does seem to be behaving as though the results were a profit warning - large drop followed by continued price drift downwards.

The Phoenix

26th Mar '18

Bit of a bounce today on higher than normal volume just wondered if anyone had any thoughts bottom fishing or more to it, does look cheap assuming no profit warning coming even if it stands still against last results,

Fegger

26th Mar '18

I do not intend to bottom fish in the current market. I am carefully watching and will sell if it declines any further as it has hit my stoploss. Would look to buy in at a lower level as like the fundamental business model and it has a decent if boring track record with good dividend record. I have been surprised by the recent market weakness.

jonno

26th Mar '18

From my point of view I think an important question, perhaps the important question is, is Headlam a good company? This is not an original idea but was put forward by Nick Train or perhaps Terry Smith, can't remember which. There will be many views as to what constitutes a 'good' company, but I would suggest it includes honest competent management, robust finances, fair treatment of all stakeholders (employees, customers and shareholders) and a business model that can be easily understood and which has stood the test of time. There are no doubt several other criteria one could include. Steve Wilson the CEO holds around 600,000 shares, which at the current price is about £2.5m, not huge but hardly insignificant.

From my point of view Headlam is a 'good' company, albeit business is clearly challenging and failing recession there is an argument for saying that the share price, which at present estimates gives a PE of <10 and yield >6% already factors in a profit warning. I continue to hold the shares and may add.

I may off course have misread the runes, but hopefully not. Time will tell!

Jonno

The Phoenix

26th Mar '18

Hi Jonno

I don;t hold at the moment but it ticks most of my boxes of a quality company and its already off near 20% from when the vague profit warning was announced in last full year results I suppose the elephant in the room is if the fact Carpetright is struggling that is maybe having a knock on effect.

JamesrWilson1989

26th Mar '18

Why would it have a knock on effect? It's a tough market out there - weaker businesses (maybe Carpetright) won't survive.

I believe Headlam is a strong business, financially secure, that will weather the storm during the typical business cycles. Remember, the average spend per transaction here is something like £130 quid. So whilst a downturn will see poorer sales, it shouldnt mean this will fall into oblivion like other big ticket items during a recession.

The Phoenix

27th Mar '18

Took a small initial position today will look to add if the chart starts heading up.

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Prof Calculus

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