Juno the worst performing stocks last month?

Juno the worst performing stocks last month?

Pre-ramble

Ok, so I’m rather scraping the bottom of the barrel now with the puntastic  headlines for my monthly review of the worst performing stocks, so I will Ju-ley retire the puns from next month (groan).

Just to recap since April I have being reviewing the worst performing stocks of the previous month to see what lessons can be learned to help us avoid investing disasters. You can see the previous reviews here :

April Fools

M’aidez m’aidez

Market Backdrop

June was a better month for the UK market as a whole with the FTSE All Share up 3.4% (down 3.5% in May)  but the number of major fallers (share price down more than 20%)  was quite consistent at 87 (94 in May)

As outlined last month I will exclude a number of industries from my review, together with micro caps (market cap £10m or less).

This substantially  reduces my target list. In order to increase the breadth of coverage I will reduce the level of detail on each stock, particularly when there are recurring themes.

Case studies

Nanoco  [NANO] 40p to 14.25p (-64%)

 

On 21st June NANO informed the market that a major (unnamed) US Customer informed them “the project will not continue beyond the current contract” (the current contract ends December 2019. The reasons were “wholly unconnected to the performance of our materials and our service delivery” which is perhaps some small comfort.

This saw Edison Research slash their 2020 revenue forecast from £13m to £4m so you have a clear picture of the degree of customer concentration here. That is the clear story here, I have mentioned customer concentration risk before and whilst I think it is too limiting to avoid such situations totally, but you do need to be aware of the risk.

A quick look back to presentations around the interim results in April seem to make clear that existing contracts extended only to December. There does not seem to have been any reason to expect cancellation at that stage, but the risk should have been clearly visible. That probably explains why the share price lost one third of its value from April to the day before this warning.

In passing I would also note that even before this cancellation the company was forecast to still be significantly loss making in 2020, so the rewards for accepting this customer concentration risk were some way off.

Kier [KIE] 278.2p to 106.3p (-62%)

Kier treated investors to not one but two adverse announcements in June. (Having fallen by more than 20% in April, but making my short list for review.)

The two adverse announcements were :

  • 3-Jun – Update on trading, FPK(Future Proofing Kier) programme, strategic review. Share-price fall : 41%
  • 17-Jun – Strategic review conclusions & indebtedness update. Share-price fall : 17%

It would take a sizeable paper to describe this situation in full, but instead we can fall back on some high level and familiar themes :

  • The share-price had been in sustained decline for two years.
  • There had been a steady stream of negative news-flow without anything earth shattering to break the trend of negativity.

I could also add that with the spectre of Carillion still firmly in the mind of the market, this is a seriously unfashionable industry to invest in. I am, however, somewhat reluctant to call this out as a theme, given that some of my best investments have come from discovering a ‘diamond in the rough’. A whole industry with a negative trend must however at least be called out as a risk factor.

Staffline [STAF] 247.3p to 118.8p (-52%)

 

This was also one of the horror stories of May. In this case the June price fall was the result of a fund-raise (open offer) to shore up the balance sheet.

I will not claim (some might) that the fund-raise was obvious from the bad news in the previous month, but it was clear that the share price was still in sustained decline and the ongoing negative news-flow had not been reversed.

Possibly, this fund raise draws a line under the issues, but I would remain cautious over the fact that they still need to regain customer trust (some customers ceased business with them in fear that they were going bust)

Costain [COST] 315p to 174.2p (-45%)

This fall resulted from a 28-Jun trading update indicating that there were “a number of delays to the timing of contract start dates and new awards.”

In my mind this one was perhaps slightly harder to predict, but we can certainly see the tell-tale 2 year share price decline. Additionally they operate in a related space to Kier, so perhaps the general industry fears were another potential flag.

Mycelx Technologies [MYX] 119p to 112.5p (-43%)

 

This is a much small company (current market cap c. £20m) so will be more volatile anyway. The trigger for the share price fall was a 14-Jun trading update, telling us that they were “facing delays in previously anticipated project bids. A significant number of these have either moved to 2020 or the start date has been delayed to later this year.”

I know very little about this business, but we can note that the share-price declined by 30% from March to June (before the trading update) so perhaps this was a sign. I am however, reluctant to call this out as a useful signal as micro caps like this tend to be very volatile anyway.

With a business of this size  investors probably need to have a more intimate view of what they do and the markets they serve, so perhaps there were secondary signs of a slowdown?

Surgical Innovations [SUN]  4.1p to 2.35p (-43%)

 

At one level I am minded to think that this should have been screened out with the “Bio techs” but this may be me misunderstanding their products.

They cite a Q2 (Apr-Jun) slowdown that they ascribe to Brexit uncertainties and uncertainties in NHS budgets.

I cannot really draw firm conclusions here, although I am not wholly convinced by either of the arguments. A business of this size (and much larger customers) will often face the risk of demand slow-downs so I would want to be sure that the potential rewards are sufficient to compensate for any short term pain. I am not sure that upside was evident here, but if it was, and the short term lull is just that,  then this could be a useful entry point for those with some knowledge.

Lookers [LOOK] 85.9p to 50.9p (-41%)

Lookers is a car retail and aftersales business. The share-price fall was triggered by the announcement that the FCA is going to formally investigate their former sales practises.

The warning signs that this may happen were apparently “disclosed in the 2018 Annual Report and Accounts “ (in March). This appeared only to reinforce a downtrend in the share-price that had started in January, so not perhaps an obvious red flag.

However I do note that whilst the announcement was made on the 25th of June resulting in a share-price decline of 25%, there was a c. 15% share price fall in the few days immediately before the announcement. That strongly suggests to me a leakage of news.

Whilst share-prices can move about quite sharply without any reason, I think that movement should have caused shareholders to sit up and ask why?

Conclusions

By extending the depth of coverage this month I have come up with a wider set of “casual factors” for sharp share price declines. However, some common themes persist.

  • A prior down-trending share price accompanies many of the sharp share-price declines (suggesting that “the market” takes overly long to respond to apparent risks)
  • Ongoing negative newsflow without a “turning point” moment is associated with further bad news. (An obvious counter-point to this would be that the turning point moment may vindicate the contrarian position – this might be something to look at in the future).
  • Customer Concentration risk is a less frequent issue, but there is certainly a case to say that such risk needs to be balanced by a suitably positive upside case. (Is there a case to say that one should wait until either the concentration risk is eliminated or the upside becomes more apparent?)
  • Negative sentiment towards a whole industry is worth y of consideration (although if one can find a genuine ‘diamond in the rough’ then perhaps this can be ignored?)
  • Niche businesses probably require niche knowledge, if your investment target is involved in particularly niche areas you probably need to understand them yourself – not rely on apparent experts.

Going Forwards.

When I started this exercise, I wasn’t sure where it would take me. Whilst I have only scratched the surface of the some the shockers of the investment universe over the last quarter I have certainly found it to be a valuable exercise thus far, but I am keen to know whether it has been of valuable to you the reader. Please let me know via the comments below (positive and negative comments all welcome).

In particular I found taking a more superficial view of the stocks in question, but therefore extending the coverage to a positive. Do you agree?

Oh and if anyone actually enjoys the punderful titles to these articles, please do let me know – otherwise they are toast.

The rest of the sinners.

Finally, let me leave you with the rest of my “short- list” of 34 stocks. If anyone has useful insights into these, they would be more than welcome.

Ted Baker [TED] (-41%), RPS [RPS] (-40%), Low & Bonar [LWB] (-40%), Carclo [CAR] (-39%), Craneware [CRW] (-38%), Steppe Cement [STCM] (-37%), Scapa [SCPA] (-37%), QUIZ [QUIZ] (-36%), XPS Pensions [XPS] (-35%), Live [LVCG] (-35%), Works co uk [WRKS] (-32%), Carpetright [CPR] (-31%), Kropz [KRPZ] (-31%), 1pm [OPM] (-30%), Pendragon [PDG] (-29%), Redt Energy [RED] (-26%), ASOS [ASC] (-26%), Non-Standard Finance [NSF] (-26%), International Personal Finance [IPF] (-25%), Kore Potash [KP2] (-24%), Thomas Cook [TCG] (-24%), Metro Bank [MTRO] (-23%), Capital & Regional [CAL] (-22%), Somero Enterprises Inc [SOM] (-22%), Filta [FLTA] (-21%), Bushveld Minerals [BMN] (-21%), Phoenix Spree Deutschland [PSDL] (-20%)

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  • comment-avatar

    Hi Tony

    Interesting article. One of the other stocks in your list of fallers (RPS Group) actually featured as the topic for my last write up. Sometimes big falls in valuation can create great opportunities ! 

    https://cube.investments/rps-group-takeover-target-rps/

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    Good piece Tony, thanks for writing. Helps all of us think about downsides as well as upsides. Cheers

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