With a spate of unexpected earnings hiccups hitting the newswires like a hammer at end of the third quarter, lots of investors are understandably concerned about how safe their nest eggs are if they’re tied up in stocks belonging to the FTSE 100 (FTSEINDICES: ^FTSE) index and the wider market.
The bad vibes all kicked off on 8 September when stockbroker Charles Stanley issued its second profit warning in less than half a year, citing an erosion of its profit margins despite the broad growth in the financial services sector this year generally. Shares of Charles Stanley tumbled 10% on the news.
A week later, on 16 September, fashion retailer ASOS fared no better when it confessed that it expected to earn about 30% less than forecast after a fire in a warehouse demolished its retail stock while the recent increase in the value of the British pound eroded what earnings it had left from overseas sales.
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But it was Tesco that really set off the panic attacks when the grocer admitted that it had overstated its profit guidance by £250m, resulting in the immediate suspension of four senior executives, including the UK managing director. “Disappointment would be an understatement,” Dave Lewis, the company’s one-month-in CEO, wearily conceded.
Have No Fear
But fear right now is a rash overstatement. In fact, things aren’t that bad at all, least of all within the bulk of the FTSE 100 index constituents, where any dips right now should definitely be seen as potential free value if the price is right. That’s because the above-listed concerns, once dissected for what they are, appear vacuous.
And just for the record, economic growth in the UK is actually looking to come in much stronger than predicted at the end of 2014, at 0.8%, according to broad consensus.
Dissecting The Root Cause Of These Jitters
Charles Stanley is seeing profit margins erode away just as it admits it is, but what it doesn’t say is that is because it is bleeding away its market share. That’s the result of having strong competition. These competitors are for the most part in the form of FinnCap and Cenkos (the latter is publicly listed on AIM, incidentally).
Let me clarify what I mean by competition so you get an idea of why Charles Stanley is such a melodramatic mess on the market right now.
FinnCap, with over a hundred clients, is now AIM’s number one broker in the UK after just eight years in business. It also became a top 10 LSE broker this year, too. Unfortunately for investors, the company is privately owned (by its 95-odd employees, as it happens), for this year the company’s revenue surged 36% to £15.5m, while earnings fared similarly. Trading revenues were 80% higher!
Just in case you missed it, that’s the real reason Charles Stanley is hurting right now.
As for Tesco, I warned investors last week about the fact that management had obviously no idea what was wrong with the company, and even suggested the new CEO might end up selling it off in bits, a fate that right now doesn’t look so improbable.
And in terms of ASOS’s woes, well, a fire in a warehouse can hardly be considered to be the end of the world as long as it’s a one-off event, and a stronger sterling is part of the consequence of the economy being in such great shape. For companies that are part of the FTSE, that’s ultimately a plus.
