Skepticism is a key ingredient to investment success
In the stock market, as in life, good news (upgrades) travels fast while bad news tends to become evident slowly. Employees, management, and boards all want to see their companies do well, and they tend to be true believers about their companies future. This optimism can make boards and management dismiss negative changes as temporary, or slow to release bad news as they try to turn things around. Publishing and free to air television would appear to be good examples of this. The loss of audience to Netflix, Youtube, Livewire and elsewhere has been a trend that has been evident for some time. Once a behavioral shift such as this starts it’s hard to see it reversing. As audience leads revenue and costs remain relatively fixed, it does not require too much imagination to see further downgrades for the free to air TV players. So one way to avoid future downgrades is to be skeptical about the nature (temporary or permanent) of any negative earnings revisions you see as management, especially CEOs, tend to be optimists.
Chris Prunty is a co-founder and Portfolio Manager at QVG Capital; a boutique investment management firm specialising in smaller companies. QVG manages money on behalf of high net worth individuals and institutions in a 'best ideas' portfolio of...