Should you panic if there is a profit warning soon after a stock market listing?
Many investors feel deflated if one of their holdings issues a profit warning soon after their IPO (initial public offering). It can feel like a double whammy: you’re disappointed by an investment not going well, plus you feel let down by a company recently making a splash with its stock market debut, full of promise for greater things ahead.
A 57% share price decline in retailer Footasylum (FOOT:AIM) since its profit warning on 19 June is a good example of the scale of the punishment for newly-listed companies messing up.
All companies are susceptible to bad news whether they’ve been on the stock market for seven months or seven years. Yet it is fair to say that investors can have elevated expectations for newly-listed businesses.
Investors often believe these companies shouldn’t experience any pains soon after listing as lawyers and other experts would have gone through the business case with a fine tooth comb to produce documents to support the stock market flotation. Any nasties should have been clearly labelled in those documents.
DON’T RUSH IN?
Some commentators say you should steer clear of newly-listed companies until they’ve had time to prove themselves on the market.
Directors often underestimate how much time they have to spend with shareholders and analysts to keep them updated on events, and they become distracted and can’t focus on the day-to-day running of the business. Other directors don’t like how their every move is scrutinised by the markets.
Ultimately these are tests of leadership strength and also whether a business model lives up to the hype created at the IPO. A flaky business will quickly get found out.
I can recall 10 companies which have issued profit warnings in recent memory within 12 months of joining the stock market. A good number suffered setbacks because of external factors out of their control; but others were clearly a result of a weak business being exposed.
For example, 10 months after its IPO, Comptoir (COM:AIM) said its new restaurants were taking years rather than months to mature as it had to educate the public about Middle Eastern food. Two months later it issued a nasty profit warning.
Footasylum’s shares recently slumped because the company backtracked on its growth targets. Having floated last year as a fast growth business, it now says more money must be spent on the business, prompting one analyst to say that wasn’t what investors signed up for at the IPO.
PATIENCE IS REQUIRED
While there are plenty more examples of corporate disappointment, it is important to look at the facts in hand and not jump to conclusions.
Just consider that two of AIM’s most successful stocks both issued profit warnings within a year of listing and have since soared in value.
BooHoo.com (BOO:AIM) fell by 40% to 21.7p in January 2015 after a marketing push failed to increase sales, plus it suffered from the wrong kind of weather. Today the shares trade nearly 10 times higher at 204.8p as the business regained momentum.
Keywords Studios (KWS:AIM) issued a profit warning two months after it floated in 2013, blamed on the delay of a new Xbox games console launch which forced publishers to push back the release of many new games. That in turn saw delayed translation work for Keywords – an annoyance but only a short-term issue.
The business has since flourished and its shares today trade 17 times higher at £18.08. (DC)