According to a recently conducted report by EY, 69 UK companies issued profit warnings in Q3 this year. That is the highest quarterly figure since 2008 and offers a wake up call to the perhaps overly ambitious (or in some cases, dishonest) executives that have overestimated the strength of Britain’s economic recovery. After the market sell off a couple of weeks ago, many share prices have begun the road to normality – however does this apply to those stocks still licking their wounds from below forecast earnings? What does the Christmas period have in store for some of these names?
From a top down perspective, there are no real surprises considering the stocks in question: low valuation, high short interest and negative EPS momentum. Implied volatility (limited coverage) has started to retreat from recent highs, as has CDS however both appear to be trading at the upper ends of their 1 year ranges.
By digging deeper though, we can uncover those stocks that have seen the most pronounced reductions in a variety of risk indicators including short interest and by doing so narrow down the list of stocks that may be beginning the road to recovery as we approach the Christmas season.
TATE LN gave its second profit warning of the year in September and fell 18% in the process. Now though, the stock is starting to show small signs of life.
We can see that EPS estimates remain negative, however analysts no doubt continue to readjust their estimates following recent turbulence. Directors have started buying stock, and short interest has come down by nearly 20% over the past week. CDS has also moderated slightly, however continues to trade above 1 year averages. With earnings in 9 days time, a small surprise could yield a significant recovery in the short term performance of the stock.
ASC LN has also had its fair share of bad news this year with profit warnings, warehouse fires and an unseasonably warm autumn. However, following a 65% drop in its share price since January, there are some small signs of hope for the distressed web retailer.
Earnings 7 days ago resulted in a modest recovery with the stock up nearly 10% over the course of last week. 2 directors. including the newly appointed COO, bought stock immediately after the earnings release and short interest has come down by 4% over the past week. The stock continues to trade at a whopping 45x earnings, although such a valuation is actually well below its average rating against the market and the sector. EPS estimates have been increased by 1% over the past week and analysts could yet increase their estimates in the coming weeks as the stock introduces new management in the lead up to Christmas.
In addition to those stocks in the recovery ward, there are a few who remain on the operating table.
HL/ LN has seen its short base rise by 14% over the past week, despite share price performance being positive (+3%) and a technical buy signal firing on Friday’s close. EPS momentum is highly divergent to 1 month price performance as well as the mentioned increase in short interest.
Finally, there seems to be little light at the end of the tunnel for TSCO LN – EPS Momentum continues to lie in the bottom 10% of the sector and CDS has blown out significantly over the past 5 days to its highest ever level. Price targets continue to be cut and the stock is trading at a 1 standard deviation premium to where it normally trades against the wider sector. The stock goes ex dividend in 2 days time and is offering a below par dividend yield of 3.4%.