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The Profit Warning Survival GuideLessons learned from 245 small cap disasters
Webinar Agenda
• About the Project
• Paul Scott, Research Study, eBook
• Anatomy of a Profit Warning
• Price action before, during, after. Do profit warnings bounce or come in threes?
• Traits of Profit Warning Stocks
• Do value or momentum stocks warn most? Which sectors warn most?
• Other Insights
• Psychology of Profit Warnings & findings of academic studies.
• Get the book & Q&A
Ed Croft Co-Founder Stockopedia.com
Former stock broker, programmer & highly motivated private investor.
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We would like to draw your attention to the following important investment warnings:
- The value of shares and investments and the income derived from them can go down as well as up - Investors may not get back the amount they invested - Past performance is not a guide to future performance Please note that all data in this document is historic and dated when this document went to print: 15th November 2016.
Disclaimer
About the Project
Why Study Profit Warnings?• Listed shares often have profit forecasts (from analysts) that
set the share valuation and price.
• When bad news hits, the company announces a profit warning
to reset expectations.
• Bad things happen… what should investors do next?
• Consensus Opinion “Buy?” - http://stk.pe/profit-warning-news
Paul Scott’s Small Cap Value Report
www.stockopedia.com/smallcaps/
Join his daily email list http://stk.pe/small-cap-value
The Source….
Spotting a warning
• “Broadly in line with expectations” (watch out)
• “Below current market forecasts” (standard)
• “Very significantly below market expectations” (severe)
• “Slightly below previous expectations” (mild)
The lexicon of profit warning announcements
Company news announcements:
http://stk.pe/profit-warnings-data
The Study
•245 Profit Warnings gathered between January
2013 and August 2016.
•Predominantly, but not exclusively, UK Small Caps.
•Team at Stockopedia.com gathered, verified,
analysed data.
•Date of next “Price Impact” for each profit warning
assessed.
•Price History & Archive Fundamentals (especially
StockRanks) Databases queried for insights.
Anatomy of a Profit Warning
The complete journey
6 months before
Day of the Profit Warning
18 months after
Do Profit Warnings Bounce?
Do Profit Warnings Come in Threes?
“It’s crazy to buy into a company that
has just produced a profit warning.
And it’s crazy to hold onto one of
your shares that has just issued one.
It’s more likely that it will issue
another one, and just because its
share price has gone down doesn’t
mean it won’t be going down some
more !”
Robbie Burns / Naked Trader
Key Insights
• When profit warnings strike, consider selling (or selling short).
• It is often best to sell as soon as possible. • Only consider buying after a profit
warning if at least 6 months have passed, and preferably in a bull market.
• Traders should only consider ‘buying the bounce’ if the shares have fallen by more than 30%. (but very high risk)
Case Study: MySale Plc
www.stockopedia.com/share-prices/mysale-LON:MYSL/
Recent Warnings to Watch Unfold
CrawshawUnited Kingdom-based company, which operates a chain of meat-focused retail food stores. September Warning.
Braemar Shipping ServicesInternational provider of services to shipping, marine, energy, offshore and insurance industries.. August Warning.
http://stk.pe/search-profit-warnings
CapitaUnited Kingdom-based company, which creates and delivers services in business process management. September Warning.
Traits of Profit Warning Stocks
Value
Momentum
Cheap beats
Expensive
Winners beat
losers
QualityQuality beats Junk
StockRanks - risk factor analysis
StockRanks
& at the top right of all StockReports on Stockopedia.com
Find the StockRank Lists at www.stockopedia.com/stockranks
StockRank PerformanceQuarterly Rebalanced portfolios of LSE stocks > £10m market cap.
* Past Performance not an indicator of future results.
90-100 StockRank
0-10StockRank
www.stockopedia.com/stockranks/performance/
Profit Warnings vs Quality Rank
Profit Warnings vs Value Rank
Profit Warnings vs Momentum Rank
Fall on day vs StockRank
Quality Rank vs 1 Year Recovery
Find high Quality shares at www.stockopedia.com/stockranks
Or check for the Quality Rank on each StockReport.
Case Study: Boohoo
There was nothing at all wrong with the figures at Boohoo in my opinion, and I checked them quite thoroughly. It was a rare beast - a high margin online retailer, throwing off organic growth from international expansion, with a growing cash pile, yet where market sentiment was (in the short term) negative due to a failure to meet very aggressive broker targets. I saw this as an opportunity, but only if growth continued at a reasonable pace, which is what happened. Paul Scott - Small Cap Value Report
www.stockopedia.com/share-prices/boohoocom-LON:BOO/
Sector Breakdown of Profit Warnings
Find defensive shares at www.stockopedia.com/sectors
Or use the filters at www.stockopedia.com/stockranks
Key Insights
• It’s may be impossible to avoid profit warnings completely.
• Own defensive shares to minimise profit warnings in a portfolio.
• Avoid the cheapest shares. • Avoid underperforming shares. • Only consider holding (or buying) after a
profit warning if it’s a high Quality Share (Quality Rank 75+)
Watch your Psychology
Real User Comments… denial?
AO World"AO World I did not think the profit warning was that bad "the Company expects the results for the financial year ending 31 March 2015 will fall slightly below market expectations." Maybe the fall of 30% is a bit overdone?”
Stanley Gibbons“The profit warning here looks to me like fairly transitory issues, which are already being fixed...This share has really been smashed down in price, and is starting to look potentially good value for a recovery maybe?”
Hargreaves Services"I think Hargreaves Services (LON:HSP) may have more prospects than suggested." "HSP, perhaps it's a get rich slowly situation. Think I'll stick with them just now."
It’s a battle for the mind !
https://www.youtube.com/watch?v=K174mUaSV4U
Watch my presentation on Behavioural Biases on Youtube
You are averse to taking losses. (Loss Aversion)
You may be following narratives not facts. (Narrative Fallacy)
You are anchored on previous prices, not reality. (Anchoring)
“The bottom line is that we find it very hard to
predict how we will behave when placed under
pressure… Do the work with a cool, rational head
well ahead of the time when you might experience
the impact of emotion and then pre-commit to that
course of action. Hence, when the emotion strikes,
the action is already set in motion and you can not
interfere.”
James Montier Value Investing
Key Insight Summary• There is no escaping profit warnings. If you own shares, expect profit warnings
and prepare a plan for dealing with them.
• Own defensive shares to minimise the number of profit warnings experienced in a portfolio.
• Avoid the cheapest shares by P/E or Yield to minimise profit warning exposure.
• Avoid underperforming shares and shares with poor earnings forecast trends to minimise profit warning exposure.
• When a profit warning strikes - consider selling (or selling short) immediately.
• Only consider buying, or continuing to hold after a profit warning if the shares are of the highest quality - preferably a QualityRank greater than 75.
• Traders should only consider placing an intraday trade during a profit warning if the shares have fallen by more than 30%. But beware the risk!
• Investors should only consider buying after a profit warning when at least six months have passed, and preferably only during a bull market.
Resources
Get the eBook
www.stockopedia.com/books/profit-warnings
Seen a Profit Warning?If you spot a profit warning please report it here:
http://stk.pe/profit-warnings
• Name
• Ticker
• Date
• URL of Announcement