The purpose of the Great Ideas column is to present strong investment ideas to readers every week. While our track record of success is good, such as a 10.1% average share price gain over the past 12 months, we don’t always get it right.

Many factors can weigh on a share price including trading setbacks, negative market sentiment and broader economic or political factors.

We always strive to update readers when something important has happened to one of our running Great Ideas trades.

Sadly some bits of news are as much a surprise to us as to you, hence why we don’t always have the chance to forewarn readers about bad news before the share price moves.

Not a good catch

A good example is AIM-quoted Fishing Republic (FISH:AIM) whose share price nearly halved in value on 13 November when it said the company would make a loss in 2017 after a ‘significant deterioration’ in trading over the past two months.

We were very frustrated with the announcement given the company had only said a mere seven weeks ago that trading was going well.

Fishing Republic reported ‘a substantial increase’ in price cutting by competitors and independent stores in recent weeks, rivals fighting hard to maintain their own market share, particularly at the end of the main fishing season.

That caused Fishing Republic’s like-for-like sales to slump 13% in October, a worryingly sharp downturn given the 16% growth delivered in the nine months to September.

The only potential bright spot is the appointment of former SuperGroup (SGP) e-commerce chief Chris Griffin as acting chief executive. Griffin has announced a strategic review to look at how the group can grow online sales.

However, we’re concerned about the lack of cash to fund any major changes to the business, given it had less than £700,000 in the bank as of 30 June. Any fundraise would likely to be done at a discount to the current depressed market value, so we don’t believe it is worth buying the stock as a recovery play.

Ultra's major setbacks

Defence firm Ultra Electronics (ULE) lost nearly a quarter of its market value on 13 November after warning on 2017 profit and announcing the exit of veteran chief executive Rakesh Sharma.

Citing ‘difficult’ conditions in the UK defence market, the company says underlying profit will be £120m against a forecast of £132m on revenue down 4% year-on-year. In hindsight we should have looked closer at the track record when selecting Ultra as a Great Idea in May.

Ultra has missed growth targets for the last four years and the company has previously flagged risks regarding defence spending.

Change in investor sentiment

Sometimes share prices can fall due to external factors rather than a negative trading update or poor financial results.

Amazon’s competitive threat is a well-known issue facing the retail sector – but have you considered the tech giant could flex its muscles in other industries?

It was brought to investors’ attention last week that the distribution sector could also face a new challenger in the form of Amazon, hence why shares in FTSE 100 services group Bunzl (BNZL) have fallen by nearly 8% in recent days to £21.32.

Investment bank Morgan Stanley issued a research note looking at the Amazon risk to Bunzl’s investment case, saying the company looked ‘vulnerable’.

Bunzl has historically commanded a premium equity valuation thanks to a long track record of earnings growth. We’ve been big fans of the stock over the years with previous articles pointing out its impressive performance with dividend growth and making good acquisitions.

In our March 2017 article we wrote: ‘Bunzl is quite simple to understand. It supplies things that companies need in order to do business; but not items they would sell to their customers. It buys companies and makes them better, leading to increased profitability and cash flow.’

Morgan Stanley is concerned about declining margins driven by customer price pressures and industry competition. It believes Amazon’s entry in to the distribution market could aggravate the margin squeeze and justify Bunzl trading on a lower rating.

Our Great Ideas trade on Bunzl is now just under 5% below our £22.39 entry price eight months ago. Fundamentally we like the company but recognise the Amazon threat could increasingly weigh on investors’ minds. We therefore cut our losses and exit the trade in the belief that market sentiment could become even more negative towards Bunzl in the short term.

Auto Trader in reverse

Also potentially impacted by the threat posed by Amazon is second hand car marketplace Auto Trader (AUTO). At 324.1p shares in the company are now 16.7% below the price we flagged the stock just under a year ago.

The market appeared underwhelmed by a fairly solid looking set of first half numbers on 9 November as the focus remains on the pressure on the wider car market amid Brexit uncertainty.

Websites like Amazon and Facebook are also seen as potential competition to Auto Trader.

Management have consistently delivered yet, noting a good stock in a bad sector can underperform a bad stock in a good sector, we
now adopt a cautious stance towards Auto Trader. (TS/DC)

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