A profit warning will always make a company’s share price fall, but what clues are there that a profit warning might be on the way or that some other kind of trouble will drastically affect a company’s share price?
1. When a company in the same industry is in trouble
When the demise or ill-health of a company in a particular industry hits the headlines, attention tends to focus on the viability of others in the same line of business.
Carillion’s collapse in January meant that people scrutinised other outsourcing companies. Capita, which runs schemes such as the television licence and the congestion charge, confessed that all was not well with it either and issued a profits warning. Its share price fell almost 50% as a result.
Other outsourcing companies such as Interserve and Serco also saw significant drops in their share prices.
2. When a company announces a new strategy
In February the AA’s chief executive Simon Breakwell proudly announced the company’s new strategy.
He said: “The strategic plan I am setting out today will unlock the full potential of the AA by delivering targeted and strategic investment in our people, our products, our systems and operations.”
Unfortunately the new strategy came with a catch – lower profit forecasts and a cut in dividend. The AA’s shares promptly fell by 25%.
3. When there is a data breach
When the story broke that Facebook may have allowed political analysis consultancy Cambridge Analytica, which worked on Donald Trump’s presidency campaign, to harvest the personal data of 50m Facebook users, $50bn was wiped off the company’s value.
With the US Federal Trade Commission reported to be investigating Facebook’s role, investor suing the social media company and advertisers getting twitchy, Mark Zuckerberg eventually broke cover to say he was “really sorry”.
Last year, a data breach at credit reference agency Equifax saw its share price plummet by more than 30%. Personal information from 145.5m consumers was hacked from its computer systems, including names, social security numbers, birthdates and addresses.
4. When commercial rents are due
Businesses tend to pay their rent four times a year. It is paid three months in advance and the old quarter days of 25 March, 24 June, 29 September and 25 December are still used on many leases in England and Wales.
Rent can be a significant overhead, especially for retailers that have kept a much larger high street presence than is necessary these days. New Look for instance has 594 stores in the UK. It is planning on closing 60 of them.
Looming rent bills tend to focus the mind of companies with lots of commercial space. Carpetright’s shares took a tumble after it said it was looking to shut unprofitable stores and secure rent reductions on other outlets. Troubled Mothercare is also intent on reducing the number of its stores.
5. When there are lots of short positions on the share
Under the Short Selling Regulation short sellers have to notify the Financial Conduct Authority (FCA) when their short positions in a company go over a certain amount.
The FCA publishes short holdings of 0.5% or over of issued share capital on its website. IHS Markit also publishes round-ups of the companies.
Current favourites on the FCA’s list include Debenhams, Pets at Home and Provident Financial.
Carillion had been a fixture on the FCA’s list for some while and at times around one-third of its stock had been loaned to short sellers.
Short and sweet
Tumbling share prices create opportunities for investors too. If you borrow shares and sell before or when the price is on the way down – go short – and buy back at a lower price, there is money to be made.
Short selling can also be done by using contracts for difference (CFDs). Here you do not have to go to the trouble of borrowing the shares – you just enter a contract to pay the difference in price between the start and close of the contract.
The short position can be held over time or opened and closed the same day.