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?

5b9a24578abc1A2.png

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…

Unlock the rest of this Article in 15 seconds

or Unlock with your email