It is easy to become ensconced in a narrative and ignore contrary new information which doesn’t fit with your thinking. But at some point, the penny drops, company plans go awry, and investors abandon the story.

This article highlights stocks where investors appear to have changed their collective minds on a company’s prospects. All the companies in the article have suffered a dramatic derating.

A derating refers to a falling PE (price to earnings) ratio. Part of the fall reflects higher interest rates, but the bulk of the rating change is down to investors abandoning the prior narrative.

HAS FACEBOOK-OWNER META LOST ITS WAY?

The alluring narrative for Facebook-owner Meta Platforms (META:NASDAQ) is its dominance in online advertising alongside Google’s parent Alphabet (GOOG:NASDAQ) and its vision to be
at the centre of the Metaverse.

The story seems to have lost some of its shine for investors in recent months after the brutal sell-off in US technology stocks. Meta, which
also owns Whatsapp and Instagram, has been one of the worst performers with its shares falling 72% from the peak, while its forward PE has halved to 12-times.

In its most recent update (27 October) Meta’s shares plunged more than 20% to trade at their lowest price in seven years after third quarter earnings missed estimates and revenue fell 4% year-on-year. The company also lowered guidance and announced job cuts.

Meta is facing increasingly stiff competition from the likes of TikTok, Snap and YouTube, who are eating its lunch among younger consumers.

The worries seem to be mounting. Increased competition in advertising, slower ad spending amid a decelerating economy and huge sums spent on developing its Metaverse.

According to Neil Campling, technology analyst at Mirabaud Securities, the spending on the Metaverse is expected to cost several billion dollars over the next few years.

Scott Kessler, an analyst at Third Bridge, noted that as Meta’s revenue has fallen in the past two quarters and its spending increased, its free cash flow plummeted. In the third quarter, Meta’s free cash flow was $173 million, compared with $9.5 billion a year ago.

But some investors are sticking to their guns despite the collapse in the shares. In his half year report Fundsmith founder Terry Smith acknowledged the possibility that Meta could be a value-trap but maintained the fund’s holding.

Smith commented: ‘Meta’s stock now trades on a FCF (free cash flow) yield of 8.7%. At this level it is either cheap or a so-called value trap. We will let you know which when we find out, but we are inclined to believe it is the former.’

WILL OCADO EVER MAKE A PROFIT?

As a growth stock with no profits, it isn’t surprising online food retailer and robotics company Ocado (OCDO) has seen its shares drop 76% over the last year.

The message from analysts’ earnings revisions has been clear with estimated full-year net losses to the end of November more than doubling to almost £400 million.

The online food retail disrupter has always polarised investors from the first day it listed on the stock exchange in 2010 at 180p. 

The bullish narrative (the world’s largest pure-play online grocery business) has had a long shelf life, but perhaps it is reaching its sell-by date.

Nevertheless, the company seemed committed to expanding its OSP (Ocado Smart Platform) and in July raised £575 million of additional capital from investors at 795p per share.

Ocado’s 12-year profitless record surpasses the mighty US retailer Amazon (AMZN:NASDAQ) which didn’t turn a profit for five years after floating in 1995.

SLOWING GROWTH A WORRY AT FUTURE

It’s hard to fault the execution at multi-platform digital publisher Future (FUTR) which has more than delivered against market expectations over the last 18 months.

It makes the 65% fall in the shares since August 2021 a tad puzzling. The forward PE has dropped from 25 to 8.8-times.

Perhaps investors are sceptical the successful acquisition-fuelled growth can continue at the same pace.

There were signs of a potential slowing at the recent full year results (30 November) when the company only guided for modest growth in 2023, leading to analyst downgrades.

As well as suffering from growth stocks going out of fashion, the weak recent sentiment towards Future also reflects concern about the outlook for advertising in a difficult economic backdrop.

And while change at the top is not necessarily a bad thing, in September CEO Zillah Byng-Thorne announced she would step down by the end of 2023.

She said ‘good progress’ had been made in identifying a successor and that chief financial officer Penny Ladkin-Brand would have her role extended to group CFO and strategy officer.

RWS LOSES FANS

Language technology services company RWS (RWS:AIM) has seen its one year forward PE shrink from 23-times a year ago to just 12.8.

In retrospect the PE a year ago was too high and earnings growth has subsequently slowed.

The investment narrative at RWS took hold after the all-share merger with SDL in November 2020. It was seen as a transformational deal which bolstered RWS’s leading market position in a structurally growing market.

The deal was widely seen as a win-win which brought together RWS’s specialist technical translation and localisation capabilities with SDL’s software, machine translation and AI expertise.

The two firms only represented around 2% of the highly fragmented $50 billion market for language services, implying a big growth opportunity if the deal worked out as intended.

It got off to a great start with RWS increasing synergies guidance to £30 million. However, synergies were unlikely to move the profit needle as they only represented around 4% of sales.

CRACKS APPEAR

The first cracks appeared less than a year after the deal had closed when long-term CEO Richard Thompson left the business. At the time investment bank Berenberg said: ‘We do not believe that a change in CEO alters our RWS investment case.’

A takeover approach in April 2022 by Private Equity Asia turned out to be a red herring and came to nothing.

After a capital markets day in the spring of 2022 hosted by new CEO Ian El-Mokadem Canaccord Genuity published a note titled, ‘no pain, no gain’ referring to a temporary reset of margins which it said ‘creates a long-term buying opportunity’.

The company outlined a plan which included a significant investment to streamline the software stack and expand into the faster growing AI data annotation market. Operating margins were expected to drop temporarily by 2.25 percentage points to 15%.

Then in October Canaccord Genuity downgraded the shares to ‘hold’ based on a darkening macroeconomic outlook.

Global recession worries are causing ‘belt tightening’ and pressuring corporate budgets which Canaccord estimates will impact around 40% of RWS’s sales.

The broker estimates Alphabet, Apple (APPL:NASDAQ) and Microsoft (MSFT:NASDAQ) generate close to 20% of sales for RWS.

To make matters worse employee costs are almost half of sales at RWS which means it is vulnerable to wage inflation.

Some fund managers see opportunity where others see problems. Odyssean Investment Trust (OIT) believes the strategic shift by the new management team will drive earnings.

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