If only…

…the market always reacted to news in the way you would expect. Well I guess that would take some of the fun out of it but sometimes quite a bit of patience is required.

It was a very busy week full of results and trading updates for the shares in my portfolio. There was news from Craneware, Games Workshop, Superdry, Jupiter Fund Management (also Boohoo.com, Somero and Liontrust which I added to the portfolio during the week).

None of the updates were bad and some of them excellent. On the other hand, the market’s reactions to them were a bit all over the place.

Craneware, my largest holding, had a very positive trading update on Monday signalling a possible acceleration of growth. The shares reacted as expected – very positively, though they are starting to look expensive to me. I might take profits on them if they rise much more.

Games Workshop issued its half-year results on Tuesday. There wasn’t much new that wasn’t already covered in the November trading update. The parts that were new for me were a much greater focus on its customer engagement in the narrative and news that the growth had continued over the Christmas period. While there was no explicit upwards adjustment to this year’s earning estimates, another big earnings beat is looking more and more likely to me now. Since my previous post on Games Workshop, I’ve become more persuaded that the changes that have driven the recent growth are permanent rather than temporary and that there could be quite a bit of growth still to come. However, the market’s reaction to the update was negative with the shares falling more than 10% from an initial spike. This could be profit taking from the many of investors that would have enjoyed a good run last year.

Superdry issued half-year results on Wednesday. Superficially they were in line with expectations, showing continued growth, particularly in wholesale, and a bullish outlook. Consequently I was initially surprised for the shares to fall 10%, particularly when Ted Baker issued an in-line update on the same day that saw its share price rise 10%. Ted Baker is a very similar business to Superdry – both are premium fashion brands of similar size pursuing multi-channel strategies to expand internationally. Ted Baker is more highly valued and growing at a somewhat slower rate, but is a bit more profitable. It seems investors might be putting more weight on the profitablity and success of capital investment rather than the topline growthat the moment. This is probably actually quite sensible. I think there may be some legitimate concern from the market that Superdry’s investment into expanding physical retail may not pay off quite as expected.  I too am a little put off by the possible lack of focus in its ‘disruptive multi-channel approach’ (with eight channels) to international expansion and question the scale of the store expansion. I think it’s too early to come to a conclusion on this and would have been prepared to give Superdry the benefit of the doubt. However, the market was not impressed with the slowing progress, particularly in physical retail, and the loss of momentum was sufficient to make me sell too for an 8% loss.

Boohoo.com issued a stellar update on Thursday with revenues doubling this year. I am becoming more and more convinced by Boohoo’s focussed business model of selling only its own brands online. The vertically integrated supply chain and focus on the cheapest distribution channel allows it to make higher margins than its competitors, while selling the products at lower prices and providing convenient next day delivery. The success of this approach is very evident in Boohoo’s sales growth and operating margin over the last few years. The growth prospects look almost limitless at the moment. There is huge scope to continue to expand internationally and gain market share and the very successful integration of the Pretty Little Thing and NastyGal brands suggests it will be able to successfully acquire more brands in the future. Following the update I’d say the shares look cheap too, almost absurdly so when compared to its online rival ASOS. So when the share price dipped after an initial spike following the results, I leapt in with both feet, only to see the price continue to fall by a further 10% and further last thing on Friday following a share sale by the Kamanis. This is perplexing. There are clearly some big holders offloading a lot of shares, so unless we get a big bounce first thing Monday I’m going to have to sell out again, even though I have a lot of conviction in Boohoo’s future success. I think there’s a lesson for me here about the danger of buying shares without momentum on side.

I made quite a few trades this week, in addition to selling Superdry and buying Boohoo. I sold Fevertree early in the week for a 3% profit as its shares lost a bit of momentum and I wanted to free up funds to take advantage of the opportunites coming up from the other trading updates. I also sold Jupiter Fund management, making a 3% profit, after some OK but underwhelming results, suggesting that its growth was slowing. I bought Liontrust Asset Management, whose results were more impressive, as the price broke out to new highs on Wednesday. The valuation still looks very cheap to me relative to other fund managers. I also bought Somero on Friday, after it issued a positive trading update, its expectations boosted by the US tax cut and the price breaking out to new highs.

I’ve reviewed my new positions (Boohoo, Liontrust, and Somero) before and don’t have much new to say about their quality, beyond my thoughts on Boohoo above.

Overall, I’d say there’s not a lot to be gained at trying to speculate about why the market reacts the way it does to news in individual cases. There are all sorts of explanations in any given case. Seeing counterintuitive reactions to trading updates for a number of shares across the whole market could be a bit of a red flag. A possible concern could be that ‘smart’ institutional money, perceiving the market to be overvalued and a correction imminent, would use positive trading updates to offload from large positions while demand from other investors is strong. Hmm… there’s not a great deal of evidence that this is happening but I’d probably be contemplating it if I had a large fund with illiquid positions. I am starting to get more concerned about the relentless positivity in the overall market indices at the moment, particularly since the start of the new year in the US. There are a lot of shares breaking out to new highs in my watchlist, giving me plenty of opportunities to reinvest following any sale, but I think I might be well served by starting to build up the cash position in my portfolio.

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