Mr. Market Hates Disappointments!
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.
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 is that each of these slumps happened in a single day, leaving their owners nursing burnt fingers overnight:
Price Before (pence)
Price After (pence)
Halfords (ISE: HFD.L)
May 31, 2012
Tesco (ISE: TSCO.L)
Jan. 12, 2012
Ocado (ISE: OCDO.L)
June 26, 2012
June 27, 2012
Mulberry (ISE: MUL.L)
June 14, 2012
Admiral (ISE: ADM.L)
Nov. 9, 2012
May 22, 2012
March 27, 2012
Feb. 6, 2012
May 16, 2012
Let's briefly look at each of these one-day share slumps in turn, from the smallest to the largest.
At the end of last month, Halfords released weak final results for fiscal 2012, 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%).
How the mighty have fallen. For 20 years, supermarket giant Tesco could do no wrong, as it grew to capture 1 pound in every 8 pounds spent on British high streets.
Then, on Jan. 12, the grocer unveiled an unexpected profit warning after disappointing Christmas trading. Mr. Market responded by snipping 14.3% off its share price. Despite a small fall in U.K. sales, Tesco still controls 30% of the grocery market, so I expect its shares to recover over time.
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 17.6%. After a decade of losses, Ocado has made a six-month profit of 200,000 pounds, which is tiny for an 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 specialty 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.
The maker of fancy handbags and other upmarket accessories released its FY 2012 results on June 14, 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.
One of the U.K.'s best-known providers of car insurance with three million customers, Cardiff-based Admiral has gone from strength to strength. Alas, on Nov. 9 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.
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 fiscal 2012.
Thanks to a regulatory run-in with City watchdog the Financial Services Authority, HomeServe's share price has been smashed from a peak of 535 pence to a mere 150 pence today. Frankly, that's the price of getting caught after ripping off consumers for years.
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 235 pence in March 2010, its shares have been repeatedly hammered since it first came under regulatory investigation. On March 27, its share price collapsed again -- this time by more than a third -- when its shares resumed trading after being suspended since Feb. 20.
9. Cairn Energy
This highly successful Edinburgh-based oil explorer and producer is a surprise entry on this list. Its shares were more than halved on Feb. 6, 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.
Last on my list -- and the worst of my one-day slumpers -- is Lamprell, whose shares crashed nearly 57% on May 16. 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 takeaway 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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