Profit warnings and profit upgrades in 2017

Richard Coppleson

Of the profit warnings this year, 81% of them have been "downgrades". I have found some really interesting observations that I’ll mention through this note that are worth being aware of, before then discussing the main 15 "Positive" Profit Warnings in 2017.

There have been 58 Profit Warnings in 2017

  • Over the last 7 months I have picked up 47 profit warnings
  • Of that 43 of them were profit downgrades& just 15 profit upgrades.
  • Of them, 15 of these downgrades came earlier in the year - before they reported in Feb– so some stocks have since reported.
  • But some - like Brambles for instance - even though they had a profit downgrade ahead of their result – they still disappointed the market when they reported.

So firstly looking at the downgrades & what they tell us …

The 43 Profit Downgrades in 2017

Source Coppo Report

43 Companies that have downgraded – of those

  • The average fall on the day was -15%
  • Since then as a group they have fallen another -1.1% ,
  • So TOTAL net fall has been down -16.2%

This chart shows the move on the Day of the Profit Warning

Source Coppo Report

BUT …

Of the 43 stocks - it seems the harder they fell day 1 – the more likely it was they would bounce off their lows…

We have seen 20 stocks rise since then(ie they have seen their bottoms & bounced back on average by +12%.

  • These stocks though had falls on average -16.2% on the day (vs the whole group -15%)
  • Also what stood out about them was that the short interest was huge in all at 4.30%.
  • So with some I’d say that there was definitely short covering by those who had been short before, or as we have been approaching reporting season a lot of these stocks have rallied in JUST the last 4 weeks.
  • Thus when looking at say ACX saw short covering, where their shorts have come back from 15.96% to now 12%& stock has recovered +12% from the day ‘after the profit warning.
  • Also “special situations” like Vocus (potential takeover) & Bellamy’s (an acquisition) have recovered due to ‘positive news’..
  • These moves have seen a “big change” 2 months ago (on 30th May) when first did this (as a dummy run) – the results were…
  • For these stocks (only 7 then) that were down -22% day 1 they are still down -11.3% since the warning.
  • But now - For these stocks (there are now 20 as more have “recovered” as we get closer to reporting Season) that were down -16.2% day 1 they are only now down -4.1% since the warning.

The 20 Stocks that have “bounced“ from the day after the warning...

Source Coppo Report

But ….

What about the stocks that fell on Day1 BUT have continued to fall – what stands out here…

  • The 23 that have “continued to fall” are now down by “an additional” -12.4%.
  • What stands out with these is that on the day of the warning these stocks were not sold off hard enough, falling only -14% on the day.
  • But following that it looks like either instos sold out or shorts came in & hit these stocks further – to be down another -12.45% after Day 1.
  • (import to understand that)
  • So total fall, in them, has is now a massive -26.4% since the warning day.

Stocks that have fallen further after their Day 1 profit warning drop day

Source Coppo Report

Chart (1) shows Profit Warnings in January 2017

Source Coppo Report

Chart (2) shows Profit Warnings in the last 6 months from Feb to July

Source Coppo Report

Looking at the move since profit warning in all 43 coys

  • What is really interesting is that of the 43 …Most are still down from where they were pre the warning (see chart below)

Firstly the stocks in January – notice ALL are still down !!!!!

Source Coppo Report

Secondly the stocks from Feb to July – 8 have recovered….

Source Coppo Report

This chart shows how they were doing 2 months ago (chart was done 1st May)

  • – notice ALL were down – but since then special situations or buying ahead of Reporting season (ie investors hoping for a “positive turnaround) has seen 8 of them “recover”
  • So it its important to understand that (to me anyway) it seems instos are happy to "avoid" or sell the profit warning stocks & stay away - but with Reporting season approaching a few instos are buying them in anticipation that we may have seen the worst & the stock turns..
  • So will be interesting to see if they really do turnaround ??...

This was from (30th May) moves in stocks that warned from Feb to May – also these are all still down !! But in recent weeks many had "suddenly" been recovering !!!

Source Coppo Report

Look the same chart as above but took out TEN (-77%) – just to get clearer look at how far the others have all fallen…

This is just to show how big the falls have been in all the others as well…. (excluding TEN)

Source Coppo Report

Profit Warnings - looking at the “Profit Upgrades” in 2017

These are the main 15 "Positive" Profit Warnings in 2017

Source Coppo Report:

  • Of the 15 Profit upgrades in 2017 the average rise on day 1 was +8%
  • & since then as a group they have added an extra +14.95% to now be up +23%.
  • The average shorts in these 15 stocks was 2.44% - but in that group there were a few stocks that had large short interest – that would have hurt the shorts (more on that just below)

How these stocks moved on the day of their positive announcement

Source Coppo Report

How they have moved in the day after (ie excluding 1st day gains)

  • Amazingly everyone has “built” on their 1st day gains…

Source Coppo Report

Looking at the “total move” since they had their positive profit warning – notice ALL these are still up since then …

Source Coppo Report

  • With the profit upgrades 3 stocks that had shorts on already – saw the shorts “increase” rather than cover as they think that they will still be right & stock will fall.
  • BUT in these 3 cases we have seen

Shorts increased in

  • A2M from 6.29% to 8.46% or +2.75% of coy & share price since then has gone up +27%
  • BSL from 0.10% to 1.75% or +1.65%of coy & share price since then has gone up +21%
  • CTD from 5.85% to 8.46% or +3.59% of coy & share price since then has gone up +13.7%
  • So it shows that some shorts are happy to look through the “short term” positives – in the “hope” they get it right in the long run …

Good luck !!??

Table shows best performing stock since profit upgrade & how its short interest of total coy moved..

Source Coppo Report

In Chart…

Source Coppo report

The shorts got it right

  • The average shorts in the 15 “UPGRADE stocks” was just 2.44%
  • While the 43 stocks that had “downgrades” had average short interest of 3.11%.

So the shorts, overall, were correct in both cases…

Source Coppo Report

BUT

  • BUT if we compare to the stocks – in the profit downgrade camp- that can be shorted -then 15 stocks that have near zero short interest are eliminated.
  • So on that basis the 28 stocks that had “downgrades”had an average short interest of 4.77%.

So this shows again that the shorts when they get onto a stock – you cannot ignore what is going on & more likely – what is about to happen …

Source Coppo Report

The Coppo Report

This article is an excerpt from The Coppo Report contributed to Livewire by Richard Coppleson, Director - Institutional Sales and Trading, Bell Potter. You can find out more here.

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Norbert Kiraly

very enlightening deep dive - minor correction as A2M released 2 profit upgrades in the period, it is in there twice.. making it 14 profit upgrade stocks for the 15 profit upgrade notices. Sadly A2M's first upgrade for the period followed a profit warning in Feb - or rather a flat projection - A2M tends to forecast over-conservatively.. which on the day and subsequent weeks caused selling & shorting that would not have happened if they had said nothing until their April upgrade announcement. I don't see A2M in the downgrades side - so maybe you don't consider it a profit downgrade - or it's excluded because the flat outlook was predicted in Feb after the good 1H result.

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Norbert Kiraly

BTW there's duplication on downgrade side too - so it's not 43 companies that have downgraded, if you're just counting spreadsheet lines to get number of coys ;-p

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