Hobson: Why Shares Fall When Results are Good

THE WEEK: Morningstar columnist Rodney Hobson analyses the extreme share price reactions to trading updated from four companies this week

Rodney Hobson 22 September, 2017 | 11:18AM
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Screwfix is owned by Kingfisher

We seem to be living in very nervous times. How else can you explain the extreme reactions – both up and down – we have had lately from trading updates that in some cases are comparatively innocuous? When you see a wild initial swing, do consider if this presents a buying or selling opportunity, depending on which way the shares have swung.

Case 1: Ocado (OCDO)

The delivery company has gone nowhere fast since being spun off from Waitrose and as far as I’m concerned it has no attractions as an investment. It has taken 15 years to get into profit and offers little hope of ever delivering a dividend. Buying the shares is a remarkable act of faith; although I’m a long term investor I’m not prepared to wait for Ocado to come right.

In that context the update covering the third quarter to August 27 was quite encouraging. It’s true that the average basket size has slipped slightly but that is far outweighed by the increase in customer numbers and the tendency to order more often. Total sales jumped 13.1%, which is pretty good going.

Vans are making more deliveries within existing catchment areas, so extra sales are not translating into extra costs.

Yet the shares promptly fell 6%. The big worry was an extra £2 million spend on hiring more software engineers and technicians to make sure fully automated distribution centres work properly. While management really should have seen this a lot earlier, it is well worth spending on distribution to get it right, otherwise the whole operation falls apart.

I tweeted on @rodneyhobson that the drop in the share price was excessive, and sure enough Ocado reduced the fall to 2% by the market close.

Case 2: Kingfisher (KGF)

The DIY chain always seems to be in a state of flux and is currently in year two of a five-year transformation programme. According to the company, progress has been “quick and impactful” but I found sales and profit figures for the six months to July 31 rather underwhelming, with operations in France still sliding. Management remains cautious over the backdrop to the second half.

For some reason the shares leapt 7% at the market opening, providing in my view an opportunity to get out. Some shareholders apparently agreed, for almost all the gain had been frittered away by close of play the following afternoon.

Case 3: Capita (CPI)

The business support services group must dread issuing its first half figures. Last year the shares fell off a cliff. This time the damage was limited to 13%, but that’s quite bad enough.

Capita is having a clear out and disposals have distorted the figures but the underlying profit performance was quite good and the dividend is maintained.  As with Kingfisher, there is a lot to take on trust, and in Capita’s case that trust is tested by the departure this month of the chief executive, but the transformation plans are easier to grasp. Meanwhile the second half should be slightly better than the first despite a fair number of caveats in the update.

Case 4: Mitchells & Butlers (MAB)

Poor weather in August hit beer sales but this pub group has come through reasonably well, with a rise in food sales offsetting a slight slippage in drinks. You have to look at the longer picture: weather is always going to be variable and M&B did very well in sunnier times. The one worrying factor is rising costs that are squeezing margins, but we had already been warned about that.

The shares have swung between 220p and 290p over the past 12 months so they are volatile but I felt a 4.4% fall in the shares after the update was unjustified. Much of the drop was recovered the following morning.


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.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Capita PLC13.96 GBX-2.92
Kingfisher PLC248.60 GBX-2.81Rating
Mitchells & Butlers PLC295.00 GBX-1.67
Ocado Group PLC357.30 GBX1.77Rating

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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