April Fools – Can we learn from the worst performing stocks in April 2019?

April Fools – Can we learn from the worst performing stocks in April 2019?

The Prologue

There is a school of thought, for which I have a lot of time, that the easiest way to consistently achieve market beating returns is cut out or reduce the investment ‘errors’ rather than stress over finding the stellar performers.

Certainly finding those stellar performers (there are a surprisingly large number of stocks that more than double in any given year)  will dramatically boost performance; but for me at least they are very hard to find and I think I can get more ‘bangs per buck’ by focussing efforts on reducing the losers.

I have tweaked a number of things in my investment approach over the last couple of year to good effect so far, but as ‘every day is a school day’ , the learning is never over and there’s always room for improvement.

With this is mind, I wanted to see what coud be learned from reviewing some of the big fallers each month. So in this review I look at whether there are any lessons to be learned from four of the biggest UK fallers in April 2019.

The Four

Jersey Oil & Gas [JOG] 226p to 73p : -68%

The Reason

JOG, an Oil & Gas Exploration company announced their  Verbier Appraisal Well Results on 3rd April, which saw the share price fall by 59% of the day. Why? “The well did not encounter Upper Jurassic sands as anticipated. As a result, our contingent resource volumetric estimations for the Verbier discovery are likely to be revised towards the lower end of the initial resource estimate” . Not quite perhaps what the oilers would call “a duster” but according to the share price movement, extremely disappointing.

Lessons

For me personally, no lesson whatsoever as I don’t invest in exploration companies for this very reason, and the fact that I do not have the knowledge to perhaps get ‘an edge’ for this type of company.

However, if one does want to play in this space, three things do come to mind.

  1. To be clear on how sensitive such companies are to a single drilling result.
  2. To understand the risk and reward; if estimates had been revised to the top end of expectations, would the share price have trebled?
  3. To highly diversify, if playing with stocks that are almost binary in outcome.

Indivior [INDV] 96p to 38p : -60%

The Reason

INDV, a speciality pharma company, was charged by the Western District of Virginia with 28 felony charges relating to the US Opiod Scandal. Whilst the company fiercely claims its innocence, it seems clear that if these charges are proven and repeated more widely across the US, then the stock is probably worthless.

Lessons

Pharma companies can in some ways have similar near binary outcomes as oil exploration companies mentioned above and whilst I haven’t fully blacklisted them in the same way, the same cautions I believe apply.

Perhaps if one had done detailed research into the sector it might have been obvious that this was a real and present danger for Indivior. However, I am not sure that I read anything calling this out in advance.

The INDV share price has been in a downward trajectory for over a year and therefore the maxim of not investing in stocks in decline would have been a saviour here. However, I would argue that in this case this was somewhat a case of luck, given that this shock to the share-price  is largely unrelated to the reason for previous falls (litigation surrounding generic competition). I tend to be on the side of Napoleon when it comes to luck.

Saga [SAGA] 111p to 58p : -45%

Reason

SAGA, the specialist provider of services to the over 50s, announced preliminary results for the Year Ending 31-Jan-19 on 4th April. In my view, the results themselves were actually not that bad – and indeed the board’s view was that they were “in line with our expectations”.

The killer, however, was the outlook : “In the near-term, a combination of margin pressures and other factors mean that profitability will be significantly below that of recent years and also below our previous expectations.”

Lessons

Somewhat more speculative here, but again it looks as though detailed research could have helped. I suspect that the underlying issue may be that as the internet has made tailoring and be spoking to different demographics all the easier that SAGA’s moat may be starting to erode. Perhaps this was obvious to anyone that was looking in depth?

On a more generic note, the SAGA share price has been in decline (albeit gentle) for over a year (since a significant fall in December 2017), so again the maxim of not buying stocks that are going down would have been a saviour here.

Premier Technical Services [PTSG] 397p to 253p : – 35%

Reason

In this case there was no obvious trigger (indeed the company’s trading statement on 10th May saw the share price recover by 10%), rather a steady but steep decline over the month,

Lessons

Reading around the internet reveals that there is apparently a “short dossier” in circulation concerning PTSG. I have not seen it and the only feedback I have heard is that it is not particularly profound, although there are questions that perhaps shareholders should be considering.

The short tracker  shows only modest (disclosable) short positions, rising to just over 1% of shares in issue by April 23rd and then falling to zero. Of course if there are a slew of small (less that 0.5%) short positions out there, this may be entirely misleading. My experience is that to influence the price in the near term, for a relatively small company, the shorts do not have to be right, just to influence market sentiment. I would not say to avoid all stocks where there is a short interest, as I have made some decent profits in such situations, but to use this as a trigger to double check your investment hypothesis and secondly to consider what may change sentiment.

More generically, one can consider that the PTSG share price has been in decline for nearly a year. So again simply avoiding stocks in a downtrend would have been a saviour here. The subsequent 10% recovery on the May trading statement does not look sufficient to break this downtrend yet.

In Summary

This is just scratching the surface, looking at only four of the biggest fallers in a single month. Nevertheless, there are perhaps some provisional take-aways from this.

  1. Beware of stocks with potentially near binary outcomes. Of course there will no doubt be some substantial winners from such stocks also, but do you have an edge?
  2. Detailed Research , could perhaps have flagged the risks in all four of these cases. However, if one looks solely for reasons not to invest in any given stock then I think there are very few stocks where you would not find some element of doubt. It is almost certain that there are ‘good’ reasons not to invest it pretty much all of the big future winners.
  3. Don’t buy into a downtrend. This is a factor in three out of four of the cases above. Again one needs to consider whether this will also prevent you from investing in some stellar gains. Perhaps, but all of the stocks that go on to outperform from a downtrend have to turn that trend around and I would argue that losing some of the gains from not buying at the very bottom (which is rarely achieved anyway) is more than offset by the reliability of buying in once market sentiment (price momentum) supports other reasons for investing.

 

It is early days for this review and I am minded to repeat this exercise in the coming months (if readers find it useful – please feel free to comment below). In the meantime I could have included further stocks in the April losers list starting with  :

  • Funding Circle Holdings [FCH] -36%
  • Nexus Infrastructure [NEXS] -34%
  • Mereo Biopharma [MPH] -33%
  • Tex Holdings [TXH] -32%
  • Bushveld Minerals [BMN] – 31%
  • Taptica International [TAP] – 30%
  • Plus 500 [PLUS] -30%

 

So please feel free to DYOR on these, I would certainly welcome reading précises on them

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COMMENTS

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  • comment-avatar

    Interesting piece . I invest quite often in binary outcomes (oil and gas ) . The simple way to avoid heavy losses is to enter a good few months before drilling and exit during drilling or shortly before . You can then scalp a decent rise but keep your capital safe (ish). What ever ….you need to caluculate when TD will be reached and sell before . Leaked news during the drill about “oil Shows” etc tends to be wrong and is best ignored .
    Be aware that you can get caught out ocassionally by equipment failure during drilling such as stuck equipment that refuses to come out of the hole so best to exit farely early in deep wells that take ages to drill so as to avoid that risk .

    • comment-avatar

      That’s an interesting idea wildrides – I guess you could call it a variant on “Buy the rumour, sell the news” (or in this case before the news!)

      It’s not something I have looked at, but if excitement – and the shareprice – routinely grows during the drilling, that might be good play. Certainly the JOG share price had a decent run up in the few months before the announcement – I’m not sure though how you would judge when the announcement is due so that you can sell beforehand – or was the date pencilled in?

  • comment-avatar

    You generally get an RNS saying :- Rig mobilsing to site , then well Spudded ,then early drilling rate
    in feet /day and aproximate time until TD in days RNS and so if you get in six months prior then the rise can be well worth having with low (ish ) risk ( watch out for placings ! )
    Not for everyone I concede ….but better than the usual wait until “duster” RNS

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