Autumn Mists, and Profit Warnings

Autumn, the season of mists and mellow fruitfulness to quote Keats, or in the case of small cap stocks the season for profit warnings it seems.

As many companies have a December year end, this is the time of year when management come to realise that given the first half figures and current trading, they are not going to meet the optimistic plans they gave out at the start of the year. Here’s just a few that have issued warnings or where the share price has dropped precipitately for other reasons that I have noticed of late (in alphabetic order): Bonmarche, Cenkos, Crawshaw, Intercede, Judges Scientific, Majestic Wine, Skil Ports and Sprue Aegis. Excuses range from too cold (earlier in the year) to too hot (more recently), to Brexit, to poor retail footfall (don’t they know more people are now shopping on the internet), to contracts being deferred, to production difficulties, to more fund raising required and of course to management’s plans not working out as expected.

The optimism of management seems to be a particular problem here that affects small companies rather than big ones – the latter are like giant oil tankers – difficult to change course abruptly and less buffeted by stormy seas. But the management of small companies are often great at telling a story about how their business plans are going to enable the company to grow sales and profits rapidly when in reality it’s a lot more difficult than they think.

So how do avoid these risks? I would suggest be wary of new management who give a great sales pitch such as in Majestic Wine where it always looked a bit optimistic to me to reinvent wine retailing in a competitive market, or Crawshaw who are reinventing butchers shops to compete with supermarkets on price. These difficult objectives can sometimes be achieved but often at more cost than is expected.

Of course it’s also the time of year when year end forecasts can be upgraded and it’s usually companies who are simply following their established business model more successfully – Abcam, Accesso and Just Eat come to mind. No great revolutions there, and not a mention of the weather, nor of Brexit or the weakness of sterling. But they do tend to have one thing in common – they all have a strong emphasis on new technology or internet based business models. That makes them a lot more predictable.

The writer holds some of the stocks mentioned above.

Roger Lawson

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