Why The Abcam Price Fall Was A Reminder Of The Risks Of High Flying Stocks

13th Sep '18 by Ben Hobson

10 comments 8280 reads

Shares in the life-sciences company Abcam fell by 15 percent when it published its full year results this week. At one point during the day, its price was down by more than 30 percent.

For random observers (who may not have even heard of Abcam), the cause of this savage drop might have looked obvious - the antibody specialist must have undershot expectations. But that wasn’t the case at all. Abcam’s results were in line with forecasts. Revenues were up, targets were hit and even the dividend was hiked by 18 percent. So why did the price tumble so sharply?

The answer was that Abcam said it was planning to invest more in research, development and expansion. Inevitably that would put pressure on earnings in the coming years, and it was this that rattled the market. Pressure on earnings is not something that Abcam shareholders are used to.

Good news… bad reaction

It’s quite common for investors to be left bemused when share prices fall on what seems like decent financial results. The causes vary, but Abcam is an interesting case. With a market cap now of £2.7 billion, it’s one of the largest companies quoted on the Alternative Investment Market (AIM). It’s also one of the most profitable. In fact, Abcam has a solid track record of growing profitability, cash generation and efficiency. This has made it very attractive to many investors. But its popularity meant it was particularly vulnerable to a stomach-churning price drop, and here’s why…

Abcam belonged - and still belongs - to a group of stocks with an investment profile we call High Flyers. They have some eye-catching quality characteristics, meaning they’re profitable, often resistant to competition and financially robust. A reputation for quality earns them support in the market. Consistent overachievement in earnings growth makes them popular. And that manifests itself in relentless price momentum.

So stocks like Abcam are appealing for their good quality and strong momentum. But the flipside of the coin is that they can end up looking expensive against regular valuation metrics. But some investors believe that eye-watering prices can be justified if earnings in a company are growing rapidly.

It was that kind of momentum that propelled Abcam’s shares from £5 to £15 in a little over three years. In that time, its average price-earning…

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andrea34

13th Sep '18

Domino's Pizza (LON:DOM) is actually another victim of growth faltering, after the CFO departed and then somewhat lacklustre results recently. The high was around 385, it's now at 281

Rusty2

I thought Abcam (LON:ABC) were below forecast? Yes but the price soon recovered, I thought the fall was overdone, if I had seen them at around 1020p I would have bought shares, another similar case has been Frontier Developments (LON:FDEV) that fell about 30% on results that were ahead of forecasts again they soon recovered. So I'm seeing buying opportunities here. The time to sell these type of shares is when growth begins to slow, that's why I sold Domino's Pizza (LON:DOM). But the High Flyers and CAMSLIM screens have done very well, many people sell out too early, myself included, I did that with Boohoo (LON:BOO) and £FVER.

bluecurve

Another High Flyer, Blue Prism (LON:PRSM), down around 8% this morning - at one point down 25%. No news that I'm aware of, just a piece on FT Alphaville that points out the obvious (it's loss making and has competition). I hold a small position in this and the share price has done very well over the last 18 months (+350%)

I'm well aware that, although a High Flyer, the underlying financials don't support the valuation - it's more of a story stock. Whether profitable or not, It's surprising how quickly sentiment can change on very little news, and what few buyers there can be to support these types of stocks when someone decides to sell in size.

JohnEustace

I see that Keith Ashworth-Lord has sold out of Domino's Pizza (LON:DOM) in his Buffetology fund. His latest newsletter highlights the fact that the CEO has gone through three FD's in less than five years and is at loggerheads with a number of franchisees.

Roger Lawson

As Abcam is one of my bigger holdings, the abrupt share price fall was certainly a shock - see my blog post on the subject here: https://roliscon.blog/2018/09/11/brexit-abcam-victoria-and-the-beaufort-case/ . To some extent, after a positive recent run I think the share price got a bit ahead of where it should have been, but it's worth noting that the directors were buying today.

ACounsell

14th Sep '18

Not a holder of Abcam (LON:ABC) but do feel this is a classic example of the short termism prevalent in much of the investment fraternity - notably City institutions. The reason for the fall despite 'in-line' results according to Ben's article 'was that Abcam (LON:ABC) said it was planning to invest more in research, development and expansion' and this would 'put pressure on earnings in future years'. This is not the first company to make this type of a statement with a resultant hit to a high flying share price but I would ask how can a technology business grow revenue and earnings in the longer term? By 'investing more in research, development and expansion' I would suggest! At least that is what the likes of £AAPL have done and they are now a trillion dollar company so it would seem to pay off 'long term' for the company and the shareholders.

twiggytwo

19th Sep '18

Very interesting article as Abcam has been one of my best performing stocks over the last 3 years and it was a nasty shock to see the price fall after such good results. I bought this as a 'fledgling' and on Jim Slater fundamentals which seem to work well along with plenty of research about the company. It appeared to have products which were original and not easily copied and I think that still holds so will stick with it!

FREng

Roger

Were the directors actually making a discretionary purchase of the shares, or was it an automatic purchase as a result of their remuneration agreements? The announcements make it seem the latter.

bill772037

as a holder of Abcam I was disappointed but I am in favour of more expenditure on R&D . Bodes well for the future

AnonymousUser252054

'At one point during the day, its price was down by more than 30 percent.'

Presumably by then most holders would have had their stop loss hit?

Why the Abcam price fall was a reminder of the risks of high flying stocks

Good news… bad reaction

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Ben Hobson

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