Profit warnings and the 20% Club

The number of profits warnings is rising and underperforming companies are being punished more harshly. Graeme Evans names the latest casualties.

With their share prices opening more than 20% lower, Low & Bonar and CMC Markets are the latest unwelcome additions to a growing list of stocks who have suffered this same punishment in recent weeks.

In the two previous sessions, Thomas Cook and Moss Bros fell by more than 20% after profit downgrades, while shares in KAZ Minerals, Footasylum and Xaar have also endured the same fate in the period since late July.

The market rule of thumb is that profit alerts tend to result in stocks being priced 20% or so lower. This, however, appears to be happening with increasing regularity.

The number of profit warnings by UK quoted companies rose 29% in Q2 compared with a year earlier, with the same report by EY highlighting a two-year high in the median share price fall on the day of downgrade.

It said the figure of 15.9% suggested that more downbeat statements are being regarded as structural, rather than one-off events.

As in the case of Low & Bonar, EY added that 35% of the companies warning in the second quarter had also done so in the previous 12 months.

The 20% Club

Source: Sharepad

*CMC Markets shares rebounded to trade down 9.3% as at midday 25/09/18

The risk of catching a falling knife at the performance materials business must have been high in the wake of last October's warning, given the temptation offered by a stock historically yielding around 7%.

Some comfort for income investors arrived in July, however, when the L&B board, led by new chief executive Philip de Klerk, kept the interim dividend unchanged at 1.05p and reported positive cash flows and a debt refinancing deal.

The pegged dividend reflected confidence in a wide-ranging restructuring plan, based around offloading the troubled civil engineering division and a focus on the successful building & industrial and interiors & transportation divisions.

But turnaround plans require an element of fortune, which is exactly what Low & Bonar appears to be missing after today's profits warning.

Low & Bonar's problems

While sales grew in line with expectations in the third quarter, the company has been hit by the rising cost of key polymers and an inability to pass on these increases at a time of intense competition. Conditions have also constrained the group's ability to reduce net debt by the level previously hoped.

To add to the difficulties, Low & Bonar has been forced to postpone its capital markets day from Q4 until next year. This is due to its recent change in chairman and ongoing search for a new finance chief, as well as the current sale process involving the civil engineering businesses.

With shares now at their lowest level since 2011, the company desperately needs that opportunity to remind investors about its potential and how it can return above the 100p mark for the first time since 2008.

Source: interactive investor (*)      Past performance is not a guide to future performance

Bargain hunting helps CMC

Unlike Low & Bonar, the interest of bargain hunters after the 21% share price fall at CMC Markets suggests that many investors think the problems at the financial derivatives firm are more short term.

After a solid first quarter, CMC said the second quarter was impacted by a sustained period of low market volatility and range bound markets towards the end of the summer period.

A decrease in overall client trading activity following regulatory changes also mean net operating income for 2019 is expected to be below previous guidance.

The overall impact on profitability is partially mitigated by tight cost control, while CMC has also reported some improvement in client activity levels since the end of the summer.

The stock has been put in the shade in recent months by online trading platform Plus500, whose performance benefited earlier this year from a surge in customers wanting to bet on the price of bitcoin and other cryptos.

Plus500 shares were down 4% to 1,454p in the wake of the CMC warning, having surged above £20 in August. 

*The blue horizontal line on the chart represents previous technical support and resistance. The red line represents the current day low.