Profit Warning Discussion Thread
There are few events in the stock market that cause as much concern and confusion as profit warnings. Reports of an earnings 'miss', a slump in trading or an unexpected setback, are naturally loathed by the market. These gut-wrenching events tend to be punished with instant and savage falls in stock prices. Shareholders caught in these situations face the emotional turmoil of sudden losses and the agonising decision of what to do next.?
One of the defining features of profit warnings is that they're shrouded in market myths, which only add to the sense of confusion. For some, profit warnings are “an ideal buying opportunity”, while others believe they ”come in threes”. Some use them as “an opportunity to average down” while others don’t dare ”catch a falling knife”.
With all this in mind, a research team at Stockopedia.com’s HQ in Oxford carried out an investigation in the summer of 2016 with the goal of building a profit warning database. The results of that work are brought together in The Profit Warning Survival Guide, where we set out to definitively answer the question of what to do in a profit warning.
While most investors hang their decision making on gut instinct or a subjective analysis of the underlying business story, we’ve taken a long, hard, rational look at the statistics.
An initial source of data on profit warnings was the daily Small Cap Value Report, written by Stockopedia’s superb small-cap analyst, Paul Scott. There are around 500 shares covered in Paul's small cap universe, which incorporates more than 25% of the UK stock market. As small caps tend to be a very popular hunting ground for individual investors, the scope of this study is particularly relevant.
We went on to analyse hundreds of smaller company profit warnings over a three-year period between 2013 and 2016 and then constructed a data set that has few peers in international research. From the data we aimed to answer several questions including:
- How far do stocks fall on a profit warning ?
- If a stock suffers a profit warning, is it likely to recover ?
- Should you buy or sell on a profit warning ?
- Is there any way to avoid profit warnings ?
- Which sectors are most hit by profit warnings ?
- Do profit warnings over-react and thus bounce ?
The goals of our research project were to uncover the facts, debunk the myths and offer a clear statistically guided pathway for investors to make more optimal investment decisions.
Not only do our findings validate the results of many academic studies in this field but provide a unique insight into the behaviour of smaller company investors on bad news. We hope these insights will help you sidestep many of the emotional snares that entrap both individual and institutional investors alike, and lead you on the path towards more profitable decisions.
In the coming months we’ll be serialising The Profit Warning Survival Guide, but in the meantime, you can download the book here.
Thanks to everyone who joined us on the Profit Warning Survival Guide webinar. We're happy to discuss the result of our research in this thread.
You can find the slides to the webinar here. We’ll post a link to the saved webinar as soon as we’ve got it available.
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
41 comments
Terrific piece of research. Intriguingly If everyone did the right thing and sold immediately after a profit warning then any company that issues one in future will have a 0p share price within minutes. Consequences might be a boom in the number of foreign takeovers and MBO's (for £1), and I can't remember if there is also a technical audit issue, too, when the value of shareholder funds falls below asset value?
Accsys Technologies (LON:AXS), half year results are out today, do not make good reading however the outlook is upbeat and the supply problems seem to have been sorted out now. No longer a holder myself but one to watch I think.
I have some shares in Cambria, an auto dealership company. Their aim is to buy underperforming dealerships and turn them around. They've been pretty good at it and have done very well.
Today they released their full year results which were record breaking...but the outlook statement is horrible. They did well in September but business since then has been soft. The shares are down 10%.
Is a case like this equivalent to a profit warning or a likely precursor to one? I really like this company, their management and their philosophy,, but after watching the webinar, maybe it is better to sell now...
I'd appreciate any thoughts.
Maffs.
Hi Maffs,
I don't hold Cambria Automobiles (LON:CAM) but I do hold Lookers (LON:LOOK) and Vertu Motors (LON:VTU). When I saw the Cambria results this morning I thought they would provide a boost to my holdings as well as Cambria. They are excellent as you say. Personally I didn't think the outlook was that bad... just telling us stuff we already know... Brexit uncertainty etc. I was in for a surprise when the markets opened! This sector is getting hammered at the moment (and has been for a while) - I have seriously looked at dumping them both today - but usually that coincides perfectly with the bottom of the trough. So for the moment I'm holding fire and see how it pans out in the next few days. It does look like an extremely harsh response.
Just had a look at Cambria Automobiles (LON:CAMB) I'm not longer a holder following Brexit. They do say October was soft. Also quite a bit about how exchange rates could affect them: "The current volatility in Sterling could impact the strategy adopted by the manufacturers that we represent."
So maybe that is the reason why the share price has fallen.
After watching the webinar, rightly or wrongly, I decided to sell my holdings in Hayward Tyler (LON:HAYT) and Redcentric (LON:RCN) . I bought both after their recent profit warnings (Redcentric a sort of profit warning). I could have sold both a week ago and walked away with a tidy 20% profit, but I held on and watched the increases slip away. In the end I've walked away with a 4% profit. The webinar tipped it for me to sell even though part of me still feels they will bounce back following the next statements. Interestingly, RCN had that tailing off trend before the big drop as shown in the webinar.
Four Month Update:
I thought it might be interesting to follow up from my post in November last year. After reading the Profit Warning Survival Guide ,I decided to sell (for a small profit) two companies I bought on the bounce following profit warnings .
Four months on Redcentric (LON:RCN). is up +9%. Hayward Tyler (LON:HAYT). is down -55%
Perhaps unsurpisingly to Ben these outcomes would support Stockopedias findings / data regards profit warnings.
I would just like to that Ed and the rest of his team for an excellent webinar.
An interesting and worthy webinar/ebook, congratulations to everyone who did the leg work to put this together.
Having just finished the ebook, there is what seems to me to be a glaring omission - having set out early on the different severities of profit warnings (broadly in line / below / materially below etc.), none of the later analysis seems to refer back to these different types.
I think it would be useful to see what the correlation is, if any, between the severity of the profit warning and the degree to which the share price falls, both on the day and over the following months. Does the severity of the warning have any bearing on the thesis that is is better to sell straight away or on the probability of a subsequent bounce occurring?
Cambian is cited in the book as an example of a company using the phrase 'broadly in line with expectations', which led to a 52% decline in share price on the day. If the average share price fall on a profit warning is 19%, you could surmise that a 52% fall on a mild warning was overdone and it might have been profitable to buy in post warning.
Looking at the subsequent share price for Cambian, they fell to 57p on the day of the profit warning (9 February), were at 64p six months later and, at 133p, are now back to where they were before the profit warning, i.e. more than doubling in the space of 3 months. I wonder how characteristic that sort of performance is for mild profit warnings?
Hi Bestace,
It's a fair comment, though we've been reluctant to categorise profit warnings based on the language used in news announcements. There's no standard and a lot of subjectivity involved both in terms of phrases used by companies and their interpretation.
We've put a close to our research in this project now, but if anyone in the community wants to have a stab at classifying all 245 profit warnings in terms of severity I'll be happy to ask someone on the team to see if there's a correlation.
The spreadsheet with all the news links is available here - https://docs.google.com/spreadsheets/d/195-M5NkM6yKrLzNerU62MTtvGD-EPa73FAvaRpNFfxg/edit#gid=0
The Sheet can be duplicated (File > Duplicate) and edited.
Ed
Hi Ed
This is excellent research and well worth promulgating. Thank you. I have one query for you:
You say in #31 that you have put a close to the research on the project. However, at the end of the Appendix of the book you invite members of the community to submit details of any profit warnings they come across.
If the research has now ended, is there any point in the community providing other examples to add to the universe?
I mean that our efforts on this data set have ended for now. We may re-open the research next summer with a new wave of interns to gather new data. We may then publish a second edition.
And, also being greedy, how about a different set of data analysis - how best to filter for shares that might be taken over at a premium...
Very interesting piece of research. Folk wisdom gives way to data-backed rules.
You might I suppose put a new line on your master stockrank chart for the cohort of firms with top quality/momentum but less than maximum value rank.
Not wanting to sound greedy, but immediately sounding greedy, can you consider repeating this kind of study for new flotations? I think it would be interestinng to see the performance in the year or 2 post-flotation - how many firms come a cropper, how many stumble and then soar..
Great idea. Sorry I missed the webcast yesterday. Have downloaded the iBook to my iPad and look forward to an interesting read.
Excellent piece of analysis Ed & Team. I got caught up in the RCN profit warning last week. I thought I got very lucky (& indeed I did) by trebling up first thing, holding for just 8 trading days before selling out for a modest overall profit. However, using your analysis, RCN has a Quality rating 69 & the fall on day one 70%, so while it was a "punt" at the time, maybe there is a little science in it!!
I think with RCN it was different. It wasn't a profit warning but a reaction by MMs to an RNS about the FO leaving and certain historic 'misstatements' being brought to light - it was actually asserted that the forecast for the current year still stood and they anticipated no repercussions on profits. All very dubious but a total over-reaction by MMs ensued who trashed the SP to an unaccountable extent, more than if it had been a humoungous profit warning. The fear factor gave rise to what I'd call a special situation - and well done for clearly recognising that in time to make money from it.
Thanks Ed
Great presentation and tremendously valuable information proves you deserve your recent reward.
Regards
Ken
Thank you for this Webinar, I would classify myself as a novice at this, but I use data analysis on manufacturing processes frequently. Do you ever use multi variate analysis software. The approach you suggest on reviewing Profit Warning is a common sub grouping approach we use. Some sub grouping examples will have higher success rates than others. I will go away an practice !! . So thank you I really enjoyed this
Nice piece of work Ed. I've never watched you make a presentation before, but you were extremely good and your enthusiasm shone through in a very understandable presentation.
Regards.
Ed, Ben
Thanks to you and the team for a fantastic piece of analysis. Stock picking is a learning process, and if I'd learned or known this analysis when I started I would have avoided an awful lot of pain...
Thanks for the webinar Ed, I caught up with it last night.
Who'd have thought that the much maligned high Momentum stocks would have defensive factors.
The pre profit warning decline also strengthens the argument for a loss management approach whether that is:
a) stop losses
b) regular monitoring of a portfolio
The slow recovery also suggests that passive management featuring a periodic rebalancing is not ideal. Perhaps individuals could adapt the passive approach to include an exception for profit warnings?
Thank you to you and your team for all of your hard work on this.
Phil
I couldn't make the webinar but the ebook is great - thank you! One request - for the average price charts, it would be really nice to see a version with decile lines (I guess by performance at the end time of the chart) to get a picture of how wide the variations are, and how much the variation changes over time. Is that possible?
Nice webinar,Ed,one question,however.Even though you demonstrated that buying after a profit warning was generally a bad idea,you kept pointing out that few companies' share prices had recovered to their pre-profit warning levels within a specified time period. However,we rarely get the opportunity to react to profit warnings until after they have had their initial effect,so isn't the price level at the close of the day of the profit warning a more relevant comparator ?
@AlanJenkings2
That's precisely the price I used. The chart that compares the 1 year return vs the Quality Rank uses the close price AFTER the profit warning as its base.
To be meaningful though, we should compare this chart with the one for stocks which do not have a profit warning. If there is a difference then the result is significant.
The diagram seems to show that there is a rough bell-shape to the distribution of 1-year returns with a few outliers and most clustered nearer 0% which on the face of it is what you would expect to see for any set of stocks. The trendline is also similar to the one you would get from looking at stocks without the profit warning condition.
Hi,again,Ed.Sorry,yes,mostly,you do.I was misled by the Boohoo case study,in which you do talk about the time taken to claw back losses from the pre-profit warning price,rather than the post-profit warning price trend,which was nearly all upward.There was also the complete journey slide,but there you were actually answering a question about shares recovering to pre-profit warning levels.
N.B. What about companies that don't issue a profit warning,but simply issue disappointing results ? I've held on to a high-ranking US share which did just that yesterday,because the quality ranking was really high,as are my transaction costs.
i too enjoyed the Webinar - it was pitched at a good pace and a good knowledge level.
I could not see how to ask questions and will have to have a dig around.
I will certainly sell on the next PW. The trouble is that if we all sell immediately, the rule will become self fulfilling and we will be in an arms race to see how fast we can sell.
Yes quite possibly. I guess it depends how crowded the position is by Stockopedia subscribers. Of course there is a key slide in the presentation that suggests that those that fall very far do tend to bounce !
Very good webinar. Many thanks.
At some time in the future might there be a webinar or ebook about research into the other side of the coin, i.e. shares which put out strong trading statements?
Totally agree, great piece of research, and would love to see the stats for the positive trading statements.
Re Profit Warning ebook.. I thought I would receive an email with pdf attachment but nothing received so far.
You will receive the book by email - but it will come tomorrow.
In the meantime the ebook is here... and we've freed it up for site members (not just subscribers) for the time being.
http://www.stockopedia.com/books/profit-warnings/
Many thanks Ed. Look forward to reading it this evening.
Hi Ed,
Can't download the ebook, perhaps because I'm not subscribed. The email link goes into a loop.
Mike
I also go in a loop
Hi Ed,
Really enjoyed the webinar today. The content was really useful and I much prefer your fast pace style to some of the other webinars that I go on which are clearly padded out. You hit all the key points, you answered some questions and then you closed it which was perfect.
The thing I took away was that in future I intend to sell quicker after a profit warning and swallow the loss!
I just looked through my portfolio and looked at where I have been guilty of hanging on to shares for too long after a profit warning.
Its also given me insight into other sell offs. For example, GB (LON:GBG) sold off recently in a way that exactly mirrors the pattern of your profit warning although in actual fact it wasn't what I would call a real profit warning.
Because it has a quality rank of 99 I have decided to keep it as your analysis suggested that it has a very good chance of recovering.
thanks again,
Carey
great work Ed and team, these kind of events really add huge value and make Stocko much more than just a subscription service and more of a community
Thanks to everyone who joined... we'll be hard at work getting the video and other resources up. Please do download the ebook at www.stockopedia.com/books/profit-warnings/ - lots of work gone into it.
One thing I'd like to ask is for everyone to share it widely whenever there is indeed a profit warning in the news... it could help save some investors some money !
Some excellent information there especially, for me, the year time frame wait.
Thanks very much for an excellent piece of research Ed. I read the ebook in a single sitting last night and I must say that its conclusions resonate very strongly with my personal experience (having suffered a rather large number of profit warnings this year). I agree that selling immediately is, on average, the right thing to do but it's hard to get out at 8am when you're on your way to work!
Anyway I've sold almost all of my warning shares recently and psychologically I'm much happier.
Damian