The current UK markets are brutal for companies that fail to meet expectations. Even short-term issues are punished severely. While it can be challenging to predict which companies will issue a profit warning next, some companies have seen very large declines, while others have escaped with a mere flesh wound. I am interested in what makes the difference and how investors can avoid the companies that are going to leave a gaping wound in their portfolio.
In August, I looked at some of the traits of the worst-performing stocks this year. This time, I am looking at the characteristics of the stocks that have performed worst in the recent past. To find out which they are, I used the Stockopedia screening tool to look for companies that have fallen more than 50% in the last month. I limited it to companies with a market cap above £5m, and therefore above £10m before their recent fall, to avoid companies where illiquidity may be driving the volatility, not trading performance. Here are the results of that screen:
From looking into these seven worst performers, I can identify three types of stocks that investors will want to avoid owning:
Expensive stocks with declining prospects
Stockopedia has a nice feature whereby past StockReports can be accessed at specific dates in PDF format:
This enables investors to see what Stockreport looked like before a precipitous fall. In this case, XP Power (LON:XPP) :
The first thing that stands out is that this stock isn't particularly cheap, with an EV/EBITDA of 11.7. This seemed expensive for a stock where 2023 normalised EPS was forecast to be below what the company delivered in 2017:
Part of the problem was that these analysts' forecasts had been consistently declining:
But even more concerning should have been the rise in net debt:
And in the trading update that caused this steep drop in share price, the company now said:
The Group continues to be in compliance with its banking covenants but is now expecting net debt / Adjusted EBITDA to be close to…
