M’aidez m’aidez

M’aidez m’aidez

[Editor’s note – the Midcap Report is taking a break until next Wednesday, 26th June. For now, please enjoy this latest missive from Tony Boden.]

The Prologue

Following on from my review of the bigger fallers in April, I set out to review some of the bigger fallers in May.

It is quite a daunting task, my market data shows an incredible 94 UK stocks falling by 20% of more In May. It certainly wasn’t a great month for the UK markets with the FTSE All share down 3.5%, but that is still quite a startling number.

Fear not, I no more have the stamina to review each of those fallers individually than you would have to read it.

Categorisation

Categorisation is of help here, I mentioned last month my aversion to near binary outcomes (unless I am sure I have an edge) and the obvious candidates here are Oil & Gas, Metals & Mining and Biotech; 38 of the major fallers came from these three industries.

There was another industry that came as a little more of a surprise: “Software & IT services” provided a further 15 of the big fallers.

Perhaps I should not have been surprised, as there is a bit of a buzz around here. It seems that the world and her husband wants to deploy some basic pattern recognition algorithms and tell you there are working on Artifical Intelligence or to rent out some software rather than sell it and claim to be a leader in SaaS. Even the white goods box-shifter AO World [AO.] is apparently a Software & IT services company.

So here is a quick summary of the big May fallers for these industries. I recognise that for the drillers and miners, commodity prices may also be a factor, but to reflect the win/loss situations here I have also shown the percentage of companies rising by 20% or more.

(The 10 BioTech stocks that fell by more than 20% represented 23% of the total BioTech stocks in my data. 11% (5) of BioTech stocks rose by more than 20%.)

I will not be looking any further at those industries in this review.

It’s a very broad brush to dismiss the entirety of the Software & IT industry in this way, so I will take a more detailed view at a later stage to seek to separate the investments from the lottery tickets.

Of the remaining 41 stocks in  my short(ish) list, 13 are ultra-micro caps (Market Cap of less than £10m); whilst there are some interesting stories amongst these, at least part of the explanation for the fall relates directly to being a micro-cap and as many investors do not look at this space, I will skip over these here.

This brings the list down to 28.

Similar to last month I will only skim the surface on some of these, but will provide the full list at the end of the article in case readers wish to do further research.

On to the big fallers….

STAFFLINE GROUP PLC [STAF] 882p to 265p (-70%)

The reason

The company issued a profits warning on 17th May which saw the share price tumble by 62%. Reading through the text of the announcement it comes across as quite reassuringly calm although when I work back from the guidance they give on EBIT (which does not seem to be a measure they report on as such, although in this case it equates to Operating Profit) it looks a reduction of FY earnings of up to 50% – ouch. There is one sentence however that leaps out at me:

“There has also been a slowdown in new contract momentum in the current financial year, which the Company largely attributes to the impact of the delay in publication of the 2018 Full Year results.”

The issue with agreeing the 2018 accounts (originally scheduled for 30th January) appears to be related to potential liabilities for historic minimum wage breaches.

What is far more significant though is some in the industry appear unwilling to do business with them as a result of this uncertainty. This would make them un-investable until this matter is satisfactorily resolved. As I note below, the red flag was waving before this trading update.

The Lesson

A number of companies are facing possible liabilities for historic minimum wage breaches and to me this would not be an automatic red flag, but certainly a pause for thought. Staffline have delivered relatively strong performance and did not look to have un-manageable debt so I could have been prepared to overlook the potential liability.

However, a company unable to agree it’s accounts – steer well clear! On 30th January when the company announced their results would be delayed, the share price fell 33% to £6.70 before being suspended in the afternoon. When they returned to trading on 12th March the close was £8.70. Even if you had sold at the lowest price on the ‘panic day’  of 30th Jan – about £6.10 – you would have still been much better off than the £2.65 by the end of May

A minor aside in this case, but the share-price has also been in a firm downtrend for some time, and that was a common factor in a number of the stocks I reviewed for April.

Countrywide [CWD] 6.5p to 4.14p (-36%)

The reason

The company issued a trading update at their AGM (30th April) which was hardly reassuring, although it was “broadly” in line with previous (low) guidance ; the share price was down slightly (8%) on the day, but continued a gradual decline throughout May until the 24th when the decline accelerated.

There was no company specific news at the time, although this may have been a response to some macro data.

The Learning

There is no obvious ‘event’ causing the fall in this case, however there are two factors in common with some of the other falls.

The share price was in an established downtrend.

The outlook in their market is “uncertain” and there has been no positive news at this stage to suggest a turnaround. Whilst I would not necessarily avoid all companies exposed to “consumer confidence” at this stage, I cannot see the generic case to be holding any companies that admit to be struggling with it, until there is any sign of a turnaround.

Eqtec [EQT] 0.79p to 0.505p (-36%)

The reason

Eqtec started the month with a market cap of £16m, (not far above my arbitrary definition of ultra-microcap) and ended below, so any learning may be of limited interest.

There are two relevant announcements here :

16th May the company issued 2.7m new shares (c. 0.1% increase in shares in issue) to pay a supplier

  • 24th May the company issued 33.8m new shares (1.7%) to pay of $330k of it debts (with a further $2.3m debt outstanding).

Individually neither transaction is particularly profound and they may even be consistent with the ongoing narrative. They do however reinforce one of the common themes I see in businesses of this size that are pre-profitability, existing shareholders can often get repeatedly diluted by the issue of new shares.

The Lessons

Mainly just a reinforcement of my view that owning ultra-micro-caps without being an insider is challenging.

The share price has also been in decline all year (and over a much longer time frame), so another tally mark for the risk of owning shares in downtrends.

Low & Bonar [LWB]  15.5p to 10p (-35%)

The reason

The share price fell 25% on a 20th May Trading Update (and has kept on going since).

This looks quite a complex situation, with two of the businesses up for sale (apparently proceeding well), some concerns over the balance sheet (although they expect to meet covenants at both the Half and Full Year.)

Trading itself though is behind and they cite several contributory factors, but for me the most telling statement was :

“Trading performance to date in the second quarter of the year to 30 November 2019 is, as anticipated in the announcement made on 1 April, stronger than the first quarter. However, the rate of improvement is below that expected, due to continued weakness in some of the Group’s end markets and the slow recovery of customer confidence in the Coated Technical Textiles (“CTT”) division.”

So things have improved, but not by as much as they hoped.

The Lessons

The forecasts were evidently based on the expectation (also known as “hope”) that performance would turn around (it did somewhat, but not sufficiently) . These days I treat such expectations with great caution and would rather sell out / not buy and pay a little more if and when the recovery is proven to be happening.

On this basis I would continue to be cautious of Low and Bonar as “The Board continues to expect the improving sales trend to underpin a stronger second half” more potential room for dis-appointment I think.

In common with the other stocks I have reviewed thus far, the share price was in a downtrend, admittedly quite shallow in the first four months of 2019, but the two year decline has clearly not been broken.

Saga [SAGA] 58.9p to 42.56p (-28% )

The Reason

In fact this was only the 9th largest faller in my sample, but as it flagged up in my April review, I thought it deserved a (dis)honourable mention.

There were no material company announcements in May to explain the further fall, which was fairly consistent over the month. I mention it simply because it is a fine exemplar of the woes of catching a falling knife; essentially in absence of new news, the market has yet to decide just how much it hates this stock..

The other three stocks I featured last month have fared better and perhaps the difference is that Saga’s April warning related to future trading.

The Lessons

Again a reinforcement of two lessons: avoid stocks in a downtrend and don’t buy into a poor outlook until there are concrete signs of a turnaround.

In Summary

There is one very clear common factor in the stocks I have reviewed above – I summarised last month as “Don’t buy into a downtrend”. On the basis of this month’s review, however, I would categorise this further and signal the following a “warning signs”:

  • An established downtrend in the share-price.
  • A poor trading outlook. Even if the company “expects” (or hopes) for this to turnaround I would avoid until there is evidence of this happening.

Staffline of course also offers an additional warning – beware companies that fail to deliver their accounts to the expected timeline. It is a risky business to hold such companies until you have seen the accounts and that they are clear.

Two months into the exercise I am surprised thus far by the simplicity of the findings (although accepting that I have only scratched the surface of the fallers.) I am going to continue reviewing this on a monthly basis for my own purposes, but unless some more profound findings come out I am not sure it will be of more general interest? (Grateful for any thoughts there.)

 

If anyone wants to look further at the other big fallers in May (outside of the sector and size exclusions above) the list is:

  • Thomas Cook [TCG] (-35%)
  • Zytronic [ZYT] (-35%)
  • De La Rue [DLAR] (-31%)
  • Just [JUST] (-30%)
  • Carpetright [CPR] (-27%)
  • Gulf Marine Services [GMS] (-26%)
  • Kier [KIE] (-26%)
  • Scapa [SCPA] (-26%)
  • Easyjet [EZJ] (-25%)
  • Gama Aviation [GMAA] (-25%)
  • Falanx [FLX] (-24%)
  • Works co uk [WRKS] (-24%)
  • Avanti Communications [AVN] (-23%)
  • Cyanconnode Holdings [CYAN] (-23%)
  • Capital & Regional [CAL] (-22%)
  • Purplebricks [PURP] (-22%)
  • Hargreaves Services [HSP] (-22%)
  • Laura Ashley Holdings [ALY] (-22%)
  • ITV [ITV] (-22%)
  • Imperial Brands [IMB] (-21%)
  • Versarien [VRS] (-21%)
  • Jaywing [JWNG] (-21%)
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