Profit Warning 100: Analysis of Profit Warnings By Ratings Given

This is the last in the series of the analysis of collated profit warnings. So far we have looked at an analysis of profit warnings by company size, and also by Stockopedia rating. We have seen some quite basic trends so far, but arguably with even the oldest of the warnings barely one year old, perhaps not enough time has elapsed so far to make any real judgements.

The last analysis is the most risky of all: analysing profit warnings by the ratings given at the time. Usually for a profit warning I may skim through quickly what it has said, together with the latest reports and I’ll write some basic notes (which are published for posterity). There are usually no purchases at all on the day of a profit warning, but they act as potential companies to investigate and more in-depth reading is done if something is to be considered. That’s how it should be, in my opinion, do not buy things on a whim.

The usual limitations apply, not every profit warning in the last year has been captured, and some companies have warned multiple times. Therefore it is not an exclusive list. The ratings are also quite arbitrary and range from 1 to 5 stars. They are not altered either and reflect the opinion on the first pass, so even if more information is discovered after or it turns out I have misunderstood something at the time, the rating is not changed.

Price data is accurate up to time of writing and the low point is taken from not from the absolute low point but the estimated average price inside of the first hour of trading.

Hopefully in time the list of data will be expanded, the current data set takes into account 103 warnings.

Highest and Lowest Ratings, Distributions

It comes as no surprise that the highest rank attained is 5/5 and the lowest is 1/5. (0 out of 5 is not possible).

The distribution was as follows:

Skewed towards the bottom end, as 1,2 and 3 stars dominate. Perhaps this is not a real surprise. Profit warnings invariably contain bad news not matter how the company tries to present it, and at that stage it is easier to be bearish than bullish.

It is also interesting that the median number is 3. Generally I would use this when the case was balanced, or if there if it was too complicated to have a stronger opinion.

Performances of companies grouped by rating

Onto the performance. The whole basket of profit warnings is down approximately 7.5% at the time of writing. Roughly weighted for purchase date I would say this lags the FTSE350 index slightly (which is flat year on year).

Companies rated 1/5 performed the worst with an average decline of -25.54% across 13 companies. Such is the case that there were some wipeouts here already, such as Debenhams and Thomas Cook. The results are somewhat skewed by Footasylum being taken over by JD Sports, which gave rise to a 91.86% price rise – perhaps I did not factor in the closeness of these two companies.

Companies rated 2/5 performed the best, surprisingly so, and delivered a small gain of 2.64% over 32 companies. There were no wipeouts in this category (yet), and there were some hefty gainers in the form of takeovers: Frontier Smart Technologies, KCOM, WYG, all posted triple-digit returns. The current ‘winner’ of profit warnings was also rated 2/5: Ten Lifestyle has more than trebled in value since it warned on profits.

Companies rated 3/5 showed a small loss of 6.53% from 38 companies and more or less tracked the basket of companies. There were some wipeouts and terrible performers in here – Flybe, Bonmarche and Quiz all lost most of their value for shareholders. There were fewer takeovers in this category: only FFI Holdings managed it. Aside from this, over half of the companies were in positive territory, helping reduce the big losses.

Companies rated 4/5 were the second worst performer, down 13.33% from 20 companies. No companies were taken over here, and no companies went bust either. The damage was done collectively, and 15 out of the 20 showed losses at the time of writing. Looking at this list I think there is a theme of some previously very good companies falling on hard times, for instance Superdry, Ted Baker, Shoe Zone. Perhaps a bias here as many stocks seem retail-focused and had previously good numbers.

Companies rated 5/5 were the second best performer at -4.07% but given there are only two of these this number may be misleading. Gear4Music is down 34.38% and this was a bit of an error on my behalf, perhaps letting personal experience cloud judgement. Although many things are easy in retrospect.

Conclusions so far

There is not too much to gain from these results so far, and my analysis has not exactly sorted the wheat from the chaff, so to speak. However, the performance of the 1/5 category gives me hope. The numbers here might be bigger than expected, perhaps to the tune of another 10% as it contains Eddie Stobart (shares suspended for accounting irregularities) and it contains others that I heavily fancy to cease trading in the near future (such as Eve Sleep).

The underperformance of the 4/5 category perhaps suggests I may be giving too much credence to historical results. Especially for retail shares, what happened in 2016 (only three years ago) may not be that meaningful for what is going to happen in 2020 and 2021. For some of them it may be tough times.

At the moment, when it comes to profit warnings I may only be inclined to say that it is easier to identify big losers as opposed to big winners. It could be the case that this on its own may be enough to generate profits; we’ll have to see next year.

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