Mr Market Hates Disappointments!

Published in Investing on 28 June 2012

There've been plenty of 'falling knives' to catch this year, even in the elite FTSE 100 (UKX) index.

When you follow the stock market as closely as I do and for as long (25 years), you become accustomed to extreme price drops. Indeed, it's a rare day when some share or another doesn't crash by, say, 25% or more in the course of a single day's trading.

Big dives

Even so, sometimes share-price falls can be dramatic, particularly at the small-cap end of the market. I've seen shares in some small companies -- notably those quoted on AIM (the Alternative Investment Market) -- plunge by 90% (or soar by more than 100%) in one morning.

Then again, this kind of wild, volatile price action is much less common at the mid-cap and big-cap end of the London market. When companies are valued in billions, rather than millions, their shares are highly liquid and tend to be considerably less volatile.

However, the past 12 months have seen many exceptions to the rule of 'the bigger the company, the lower the share-price drops'. Indeed, dozens of companies have seen their share prices hammered in 24 hours, usually after badly disappointing 'Mr Market'.

Ten slumps for shareholders

What seems particularly evident this year -- in this age of sovereign insolvency and eurozone angst -- is how very unforgiving Mr Market can be when company results or strategies prove below par.

For example, the table below lists 10 one-day slumps in the share prices of members of the FTSE 350 index. The bad news for shareholders is that each of these slumps happened in a single day, leaving their owners nursing burnt fingers overnight:

CompanySlump datePrice before (p)Price after (p)Slump (%)
Halfords (LSE: HFD)31/05/12275.9241.9-12.3%
Tesco (LSE: TSCO)12/01/12385.0330.0-14.3%
Ocado (LSE: OCDO)26/06/12108.189.1-17.6%
Yule Catto (LSE: YULC)27/06/12176.9138.0-22.0%
Mulberry (LSE: MUL)14/06/122,013.01,560.5-22.5%
Admiral (LSE: ADM)09/11/111,193.0887.5-25.6%
Homeserve (LSE: HSV)22/05/12227.4168.6-25.9%
CPP (LSE: CPP)27/03/12103.065.8-36.2%
Cairn Energy (LSE: CNE)06/02/12733.1345.1-52.9%
Lamprell (LSE: LAM)16/05/12294.8127.0-56.9%

Let's briefly look at each of these one-day share slumps in turn, from the smallest to the largest.

1. Halfords

At the end of last month, Halfords released weak final results for 2011-12, revealing falling gross margins, a 22% fall in basic earnings per share, rising net debt and a frozen dividend. Mr Market's response was to slap down the bike retailer's share price by nearly an eighth (12.3%).

2. Tesco

How the mighty have fallen. For 20 years, supermarket giant Tesco could do no wrong, as it grew to capture one pound in every eight spent on British high streets.

Then, on 12 January, the grocer unveiled an unexpected profit warning after disappointing Christmas trading. Mr Market responded by snipping 14.3% from its share price. Despite a small fall in UK sales, Tesco still controls 30% of the grocery market, so I expect its shares to recover over time.

3. Ocado

I've never been convinced by Ocado's business model and the long-term sustainability of its earnings.

Hence, I wasn't at all surprised on Tuesday when the release of its latest half-year results saw its shares slide by nearly a fifth (17.6%). After a decade of making losses, Ocado has made a six-month profit of £0.2 million, which is tiny for a FTSE 250 firm. In addition, net debt is rising steeply, which must be a worry.

4. Yule Catto

Wednesday's candidate for biggest one-day faller in the FTSE 350 was speciality-chemical maker Yule Catto. This trading statement warned of "challenging trading conditions" that have "continued through the remainder of the first half of the year". With demand "subdued in Europe and North America", Mr Market decided to slash the firm's share price by almost a quarter (22%).

5. Mulberry

The maker of fancy handbags and other upmarket accessories released its 2011-12 results on 14 June, reporting revenues up 38%, profit before tax up 54% and a 25% dividend hike. Despite these sparkling figures, Mr Market worried that Mulberry's go-go growth was slowing, so he instinctively sliced 22.5% from its shares.

6. Admiral

One of the UK's best-known providers of car insurance and with three million customers, Cardiff-based Admiral has gone from strength to strength. Alas, on 9 November last year, Mr Market gave its interim results the thumbs-down, wiping 25.6% from the insurer's share price. Despite a 30% increase in Admiral's turnover, rising claims costs made Mr Market nervous, hence his savaging of its share price.

7. Homeserve

For more than a decade, I have been a huge critic of Homeserve and its home-emergency plans, which offer very poor value for money. Hence, I was unsurprised to see the firm suffer yet another share slump, this time after releasing its final results for 2011-12.

Thanks to a regulatory run-in with City watchdog the Financial Services Authority (FSA), Homeserve's share price has been smashed from a peak of 535p to a mere 150p today. Frankly, that's the price of getting caught after ripping off consumers for years.

8. CPP

CPP -- known for its card protection plans that provide emergency support and protection against fraud when plastic cards are lost or stolen -- is another firm that has been taken to task by the FSA.

Having floated at 235p in March 2010, its shares have been repeatedly hammered since it first came under regulatory investigation. On 27 March, its share price collapsed again -- this time by more than a third (36.2%) -- after its shares resumed trading after being suspended since 20 February.

9. Cairn Energy

This highly successful Edinburgh-based oil explorer and producer is a surprise entry on this list. Its shares more than halved on 6 February, diving 53% that day. However, this fall was far from a disaster for Cairn's owners, as it followed a share split and capital return to investors.

Nevertheless, investors who hadn't anticipated this corporate action in advance may have panicked when they saw Cairn's share price plunge.

10.Lamprell

Last on my list -- and the worst of my 'one-day slumpers' -- is Lamprell, whose shares crashed nearly 57% on 16 May. This nose-dive came after the provider of engineering services to oil and gas firms released a truly terrible trading statement. With costs soaring and contracts delayed, Mr Market had no choice but to pound Lamprell's share price like a nail.

What's the take-away message?

I believe it is that, no matter how well it has done in the past, any business can stumble at any time. Hence, investors should pay close attention to the financial calendars of the firms in which they own shares. Also, shareholders should not count their chickens before they hatch, as any company's shares -- no matter how big -- can take a beating when Mr Market is displeased!

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More from Cliff D'Arcy:

> Cliff does not own any of the shares mentioned in this article. The Motley Fool owns shares in Tesco and Halfords.

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Comments

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ukvalueinvestor 28 Jun 2012 , 12:49pm

For me the lesson from volatility is to be diversified. I own Chemring, and owned it before the recent big price drops. I thought (and think) the price was good when I bought and is even better now, but it's been down anything up to 50% which is enough to make anybody go grey.

However, because Chemring is less than 5% of my pot I'm able to more or less ignore the drop as I haven't seen anything major change in the fundamentals... so the price drop is meaningless, or at least that's how it seems so far.

That's one reason why I think stop losses are crazy, unless you're a chartist.

chubbybrown 28 Jun 2012 , 1:06pm

First group was a bit savage as well.

lotontech 28 Jun 2012 , 1:38pm

ukvalueinvestor:

Speaking as someone who wrote an entire book solely about "stop orders", I think you're right that good diversification reduces the need for them. But in this case, good diversification means having separate holdings (as you imply) rather than putting all your eggs into the "single basket" of the FTSE 100.

Furthermore, "stop orders" (my preferred term to "stop losses") are not just for stopping losses; you might use them to secure some level of accrued profit on a winning position while leaving the position to run for an even higher profit.

Tony Loton

merchantprince00 28 Jun 2012 , 2:01pm

So does Tesco only capture 99.5p in every £8 now then?

UncleEbenezer 28 Jun 2012 , 4:10pm

You forgot the ones that dropped right out of the FTSE 100.

Like ISAT, that got clobbered when its best customer fell foul of defects (totally outside its control) in GPS. Or like EMG, which looks like a sinking ship.

PlayDumb 29 Jun 2012 , 11:08am

TMF should do a similar write-up on 1-day winners as well. Typically (I suspect) this will involve resource companies (O&G, precious metals etc.) that are bring bought out at a premium. ALD today, UMC (aviation engg services) few months back, Alterian (software, last year?).

It would be a bit revealing to compare the relative performance of the 2 sets.
I myself focus on 10day fallers, but as someone said 'invert, always invert' !!

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