These are anxious times, when a moderately disappointing set of results can have a disproportionate impact on the share price. But is that because investors have had an attack of nerves or is it, as has been suggested on Twitter, a case of traders playing games? The distinction is important, as it affects whether the bull market is genuinely over.
The issue came up when WPP (WPP) shares slumped by 25% at one point on patchy third quarter figures. The worst bit was that the advertising group cut its outlook for sales and profit margin for the rest of this year, citing a slowdown in client spending and structural changes in the industry.
Revenue slipped 0.8% in the three months to the end of September but that was entirely due to forex fluctuations. The decline was greatest in the North America businesses, where WPP lost some clients and others cut back on spending.
One must allow for a little bit of back covering in the statement. New chief executive Mark Read was keen to say that WPP had failed to invest sufficiently in the creative side of the business for several years while the blame can still be laid on the ousted Sir Martin Sorrell. If things don’t turn out too badly, then Read gets the credit for his “decisive action” in turning around the sprawling empire.
I therefore take the warning with a modicum of scepticism. Nonetheless, North America is the one place where you would not expect to be doing badly while the world’s largest economy continues to grow strongly.
WPP's Change of Outlook is Worrying
It is only six weeks since WPP actually raised its guidance yet now Read says that the slowdown is a continuation of trends seen over the past 18 months. This sudden reversal hardly inspires confidence.
There clearly are problems that are specific to WPP. Its shares stood at £14.70 in February. They have slipped below 900p this week. Not all of that is down to the upheaval over Sorrell’s messy departure.
However, there are also wider implications when a company that is still comparatively successful can see its shares dive so dramatically. I don’t buy the traders playing games argument. If shares are marked down too far then they will bounce back rapidly as investors see they are underpriced. The market soon corrects itself. If no buyers come forward, that is itself a reflection of how nervous investors are.
I do agree with the general point that small investors like myself will probably cling on and hope for the best. At least if we are in for the long term we can grit our teeth through the bad times. It would be wrong, though, to pretend that all is well. As I have said before, it is very hard to spot shares that are obvious bargains at current levels. This could be a scary Halloween.
RBS Shares Unfairly Marked Down
I have constantly warned about Royal Bank of Scotland (RBS), because it didn’t make a profit, didn’t pay a dividend and there was an overhang of government-owned shares. Yet the shares continued to defy gravity for reasons I really cannot understand.
RBS now makes a profit and pays a dividend. Some of that overhang has been sold off. Yet the shares are falling. They were above 300p in January and now trade 25% lower. They lost 4.5% on a perfectly acceptable third quarter statement this week.
The market usually gets things right over time. This correction has been a long time coming – and I still don’t understand why now. I stay well clear of things I don’t understand.
Come Say Hello
If any readers of this column attend the Manchester Investor Show at the Mercure Hotel in Manchester Piccadilly on Friday 9 November please come and talk to me. I’ll be delivering a seminar, speaking on a panel and chairing another.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.
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