Good morning!

Tangent Communications (LON:TNG)

Share price: 7.5p
No. shares: 277.1m
Market Cap: £20.8m

From what I can make out, this is basically a company that prints marketing material, through its websites. Today's announcement has derailed the bull case, with the shares currently down about 20% on the day.

General comments on profit warnings - Profit warnings are fairly frequent with small caps - it's an occupational hazard unfortunately, as small companies are usually reliant on a small number of key clients, contracts, products & staff. Whereas larger caps have a more diversified spread of business, which smooths out bumps in the road at any individual part of the group.

This high risk of profit warnings is why it's such a bad idea for investors to use gearing, or to over-concentrate one's portfolio with small caps. Been there, done that. In my view, little to no gearing, and a reasonable degree of diversification is the only way to go with small caps investing. Together with a focus on strong Balance Sheets of investee companies (so that they can survive & recover from profit warnings).

Therefore I always look at profit warnings as potential opportunities - especially in a bull market this can often be your only chance to buy into a good company at a reasonable price. Also, profit warnings tend to be forgiven much more quickly in a bull market - in a few weeks the share price can be recovering again.

However, it all hinges on separating out the good companies from the bad. Also, the old adage that profit warnings come in threes has to be borne in mind - i.e. management usually don't give the full picture at the first profit warning, there is very often more bad news to come.

So weighing up all these factors is just as much an art as a science - interpreting the wording, and assessing how open & honest management are, matters just as much as the figures. I will usually only buy if the valuation still stacks up if another 20% fall in earnings (beyond what has been reported at the current profit warning) can be comfortably absorbed.

Profit warning from Tangent - today's trading update covers the six months to 28 Aug 2014, so it's a week early, as presumably the company has tried to recoup the shortfall but now realise it's too late. The key part says;

Group…

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