The Profit Warning Survival GuideLessons learned from 245 small cap disasters

Webinar Agenda

• About the Project

• Paul Scott, Research Study, eBook

• Anatomy of a Profit Warning

• Price action before, during, after. Do profit warnings bounce or come in threes?

• Traits of Profit Warning Stocks

• Do value or momentum stocks warn most? Which sectors warn most?

• Other Insights

• Psychology of Profit Warnings & findings of academic studies.

• Get the book & Q&A

Ed Croft Co-Founder Stockopedia.com

Former stock broker, programmer & highly motivated private investor.

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We would like to draw your attention to the following important investment warnings:

- The value of shares and investments and the income derived from them can go down as well as up - Investors may not get back the amount they invested - Past performance is not a guide to future performance Please note that all data in this document is historic and dated when this document went to print: 15th November 2016.

Disclaimer

About the Project

Why Study Profit Warnings?• Listed shares often have profit forecasts (from analysts) that

set the share valuation and price.

• When bad news hits, the company announces a profit warning

to reset expectations.

• Bad things happen… what should investors do next?

• Consensus Opinion “Buy?” - http://stk.pe/profit-warning-news

Paul Scott’s Small Cap Value Report

www.stockopedia.com/smallcaps/

Join his daily email list http://stk.pe/small-cap-value

The Source….

Spotting a warning

• “Broadly in line with expectations” (watch out)

• “Below current market forecasts” (standard)

• “Very significantly below market expectations” (severe)

• “Slightly below previous expectations” (mild)

The lexicon of profit warning announcements

Company news announcements:

http://stk.pe/profit-warnings-data

The Study

•245 Profit Warnings gathered between January

2013 and August 2016.

•Predominantly, but not exclusively, UK Small Caps.

•Team at Stockopedia.com gathered, verified,

analysed data.

•Date of next “Price Impact” for each profit warning

assessed.

•Price History & Archive Fundamentals (especially

StockRanks) Databases queried for insights.

Anatomy of a Profit Warning

The complete journey

6 months before

Day of the Profit Warning

18 months after

Do Profit Warnings Bounce?

Do Profit Warnings Come in Threes?

“It’s crazy to buy into a company that

has just produced a profit warning.

And it’s crazy to hold onto one of

your shares that has just issued one.

It’s more likely that it will issue

another one, and just because its

share price has gone down doesn’t

mean it won’t be going down some

more !”

Robbie Burns / Naked Trader

Key Insights

• When profit warnings strike, consider selling (or selling short).

• It is often best to sell as soon as possible. • Only consider buying after a profit

warning if at least 6 months have passed, and preferably in a bull market.

• Traders should only consider ‘buying the bounce’ if the shares have fallen by more than 30%. (but very high risk)

Case Study: MySale Plc

www.stockopedia.com/share-prices/mysale-LON:MYSL/

Recent Warnings to Watch Unfold

CrawshawUnited Kingdom-based company, which operates a chain of meat-focused retail food stores. September Warning.

Braemar Shipping ServicesInternational provider of services to shipping, marine, energy, offshore and insurance industries.. August Warning.

http://stk.pe/search-profit-warnings

CapitaUnited Kingdom-based company, which creates and delivers services in business process management. September Warning.

Traits of Profit Warning Stocks

Value

Momentum

Cheap beats

Expensive

Winners beat

losers

QualityQuality beats Junk

StockRanks - risk factor analysis

StockRanks

& at the top right of all StockReports on Stockopedia.com

Find the StockRank Lists at www.stockopedia.com/stockranks

StockRank PerformanceQuarterly Rebalanced portfolios of LSE stocks > £10m market cap.

* Past Performance not an indicator of future results.

90-100 StockRank

0-10StockRank

www.stockopedia.com/stockranks/performance/

Profit Warnings vs Quality Rank

Profit Warnings vs Value Rank

Profit Warnings vs Momentum Rank

Fall on day vs StockRank

Quality Rank vs 1 Year Recovery

Find high Quality shares at www.stockopedia.com/stockranks

Or check for the Quality Rank on each StockReport.

Case Study: Boohoo

There was nothing at all wrong with the figures at Boohoo in my opinion, and I checked them quite thoroughly. It was a rare beast - a high margin online retailer, throwing off organic growth from international expansion, with a growing cash pile, yet where market sentiment was (in the short term) negative due to a failure to meet very aggressive broker targets. I saw this as an opportunity, but only if growth continued at a reasonable pace, which is what happened. Paul Scott - Small Cap Value Report

www.stockopedia.com/share-prices/boohoocom-LON:BOO/

Sector Breakdown of Profit Warnings

Find defensive shares at www.stockopedia.com/sectors

Or use the filters at www.stockopedia.com/stockranks

Key Insights

• It’s may be impossible to avoid profit warnings completely.

• Own defensive shares to minimise profit warnings in a portfolio.

• Avoid the cheapest shares. • Avoid underperforming shares. • Only consider holding (or buying) after a

profit warning if it’s a high Quality Share (Quality Rank 75+)

Watch your Psychology

Real User Comments… denial?

AO World"AO World I did not think the profit warning was that bad "the Company expects the results for the financial year ending 31 March 2015 will fall slightly below market expectations." Maybe the fall of 30% is a bit overdone?”

Stanley Gibbons“The profit warning here looks to me like fairly transitory issues, which are already being fixed...This share has really been smashed down in price, and is starting to look potentially good value for a recovery maybe?”

Hargreaves Services"I think Hargreaves Services (LON:HSP) may have more prospects than suggested." "HSP, perhaps it's a get rich slowly situation. Think I'll stick with them just now."

It’s a battle for the mind !

https://www.youtube.com/watch?v=K174mUaSV4U

Watch my presentation on Behavioural Biases on Youtube

You are averse to taking losses. (Loss Aversion)

You may be following narratives not facts. (Narrative Fallacy)

You are anchored on previous prices, not reality. (Anchoring)

“The bottom line is that we find it very hard to

predict how we will behave when placed under

pressure… Do the work with a cool, rational head

well ahead of the time when you might experience

the impact of emotion and then pre-commit to that

course of action. Hence, when the emotion strikes,

the action is already set in motion and you can not

interfere.”

James Montier Value Investing

Key Insight Summary• There is no escaping profit warnings. If you own shares, expect profit warnings

and prepare a plan for dealing with them.

• Own defensive shares to minimise the number of profit warnings experienced in a portfolio.

• Avoid the cheapest shares by P/E or Yield to minimise profit warning exposure.

• Avoid underperforming shares and shares with poor earnings forecast trends to minimise profit warning exposure.

• When a profit warning strikes - consider selling (or selling short) immediately.

• Only consider buying, or continuing to hold after a profit warning if the shares are of the highest quality - preferably a QualityRank greater than 75.

• Traders should only consider placing an intraday trade during a profit warning if the shares have fallen by more than 30%. But beware the risk!

• Investors should only consider buying after a profit warning when at least six months have passed, and preferably only during a bull market.

Resources

Get the eBook

www.stockopedia.com/books/profit-warnings

Seen a Profit Warning?If you spot a profit warning please report it here:

http://stk.pe/profit-warnings

• Name

• Ticker

• Date

• URL of Announcement

Take a 2 Week Trial

www.stockopedia.com/r/warnings

www.stockopedia.com