Profit Warning 100: Analysis of Profit Warnings By Stockopedia Stock Rank

This is the next in the series of my analysis of profit warnings from the data I have collected. In the past week I did look at warnings grouped by company size, you can read about it here. Here, we saw that smaller companies performed better after profit warnings than larger ones. There is not enough data to state this as fact, additionally many warnings are still very new and more time is needed to see whether the trend continues.

This time we will look at Stockopedia Stockranks (SR) as a factor. I use Stockopedia quite a lot and am a fan of it. If you are not familiar with this term, a Stockrank basically is their take on a company put into a percentage figure. It is comprised of three different characteristics, Momentum, Quality and Value and appeals to a wide range of traders.

Let us begin by reminding us of the limitations: we cannot claim to have captured every profit warning in the past year, some have slipped by, other companies have also warned more than once. Additionally, the Stockranks bring in their own limitations. They are backward looking metrics, and rate a company on what it has done, rather than its forward prospects. In general companies with higher SRs are deemed be better than ones with low ones, but this is not exclusive: there are some companies I would not touch with very high ratings, and some that are very good with very low ratings.

For reference, the Stockrank is collected on the day of the profit warning. They tend to jump about a lot and in some cases can be quite volatile.

Again, hopefully we will expand the list of data and will have more insights in time. The total number analysed goes up to 102 as it incorporates a couple of warnings issued in the last week.

Highest and Lowest Stockranks, Distributions

The highest rank was that of Plus500 (99), and the lowest was Eve Sleep (0). It seems that rank does not affect the possibility of a profit warning at all. The median SR of a company warning on profits was 56, and the average was 55.

The distribution is quite even:

We are unsure of the distribution of Stockranks for all companies, but it appears from this data that profit warnings affect companies of any SR fairly equally. With the 61-80 category being the most popular, it appears that picking companies with reasonable ratings is no real protection from future profit warnings. This makes sense in line with the ‘backwards-looking’ metric.

Performance of companies grouped by StockRank

This brought out some interesting results. Let us re-iterate that the data set is still small, and as such limited conclusions can be drawn. Price changes are from the average of first hour trading following the warning.

Companies with 81+ SR fared worst of all with a massive loss of -26.71% on average. In fact many of the very top rated stocks are yet to make any recovery, such as Plus500 (-26.53%), Royal Mail (-45.37%), and Nexus Infrastructure (-19.37%) all being 98 or above. In fact only three companies out of the 21 in this category have gone on to have a higher price since their warning, for interest these are Character Group (+15.71%), Galliford Try (+10.71%) and Portmeirion (+0.43%)

In addition, the SR picked out some businesses that seemed to have structural decline issues facing them, such as Bonmarche (85), Moss Bros (91), and some such as Goals Soccer Centres gave some really bad news in the form of accounting irregularities. Some of the worst performers were in this category.

Companies with SR of 61-80 was the most populous segment with 26 companies. The performance was middle of the road. There was an average of a 9.3% decrease (this is pretty much in line with the average of the whole dataset. The distribution of profits was much better.  10 out of the 26 being equal to or above their profit warning price. There were some big losers and winners here, Flybe had a rank of 70 and was a wipeout, KCOM had a rank of 65 and was taken over at a large premium.

Companies with SR of 41-60 overall outperformed and were up be 3.43% overall from 21 entries. In fact, more than half (11) of all companies were at higher prices than at the profit warning date. Surprisingly, there are only two companies where the share price dropped by more than another 50%: Superdry (-50.96%) and Xaar (-73.64%). This result is perhaps slightly skewed by a big outsider which was bought out: WYG had a SR of 45 but its takeover price represented a near 200% premium of its profit warning price.

Companies with SR of 21-40 were the second worst group, delivering an average loss of 19.95%. In this category, there were a couple of wipeouts: both Debenhams and Thomas Cook were not good investments. Brady (-91.22%) also lost most of its value, whereas CVS Group (+110.52%) doubled since its warning.

Companies with SR of 0-20 fared best of all, although this was on more limited data (16 entries). The reasons why jump out straight away, there are two companies which more than doubled in value: Frontier Smart (+123.18%) and the star performer Ten Lifestyle (+294.07%). There were a couple of big losers: MySale (-85%) and LoopUp (-62.71%). The big winners have skewed the results. It’ll be interesting to see what happens on a bigger set of data.

So there we have it. The rough conclusion at present is that companies with a higher StockRank suffer more when they issue profit warnings. The ones with the worst may actually fare better.

Some of this isn’t particularly a surprise to me. Companies with a high rank are often ‘flavour of the month’ type companies, and are often well bought. Because momentum is a component in the ranking, they also tend to be at high prices. A profit warning often derails momentum, and so these types of shares have further to fall.

Companies with lower ranks tend to be lacking this boost, and may be unpopular with investors anyway. So arguably a lot of bad news could already be priced in.

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