Here is a chart of Supergroup PLC:
This news story piqued my interest because it is a great example of what value investors look out for – companies in trouble.
The reason for Supergroup’s price decline is because of a series of profit warnings issued by management culminating in a fourth consecutive profit warning in April 2012 – this last profit warning led to a one day price decline of 37%.
A price decline of that magnitude
should be is an alarm bell for value orientated investors who get interested in companies when they are in some kind of trouble and register a large price decline. 37% in one day is large.
What to do when faced with a troubled company
If you are short of time but want to take action, the best thing to do is place the company on a watch list so that you are able to research it when time permits.
If you have time for analysis, then you can use one of Ben Graham’s value investing strategies to perform due diligence on the company. But choose carefully.
For example, the fact that Supergroup is a FTSE 250 company means that The Relatively Unpopular Large Company is an inappropriate strategy to use.
You could instead use A Winnowing Of The Stock Guide for an initial assessment but you must – and it is a must – read the annual reports going back a decade. This is to ensure that you get a good sense of how management has performed and how the financials have performed over a long enough time period to encompass downturns, recessions or cyclical trading that may be peculiar to the company’s industry or sector.
Supergroup – Problems From The Start
Had you begun the research process on Supergroup when the investment opportunity existed (the day of its huge price decline), you would only have had two annual reports to evaluate since its third was released in August of this year. This means that:
- There is additional risk associated with an investment in Supergroup – 2 years’ worth of financial data is not enough to gain an understanding of how management has performed in the past – 10 years is the ideal
- A lack of 10 years’ worth of financial data does not preclude an investment in a company, it simply increases its risk. To mitigate this additional risk, extreme due diligence and a reduced capital allocation are required. In other words don’t buy as many shares as normal and if you do, realise that the investment could very well go to zero.
For a better understanding of the research process and what is involved, please take a look at this page.
Value Investing: Get Interested When There’s Trouble
The investment opportunity in Supergroup has passed, that goes without saying.
The point of today’s post was to show how you can at the very least start to build a watch list of companies that may meet some of Ben Graham’s criteria for investment, by looking out for companies who are not having a good time of it.
Using a website like ADVFN will allow you to track your investments in a risk free environment by using their ‘portfolio’ function to set up a virtual portfolio of companies. I mention this because Ben Graham insisted that investors first practise the art of value investing for at least 12 months before committing a single penny to the stock market.
I missed the opportunity with Supergroup, but you can be sure that I will not be missing an opportunity like Supergroup again. That’s the wonderful thing about the stock market. There will always be another opportunity lurking just around the corner.
Thanks for reading this post which I wrote rather hurriedly; I wanted to quickly look at the beginning of the investing process in a bit of detail – that of finding opportunities.
Here’s wishing you all the best with your stock market endeavours. Cheers.