The Trader: Profit warnings

Michael takes a look at some of the profit warnings announced in the last week and how they could’ve been avoided. 

It’s been a quiet week in the first trading week of 2023. But the profit warnings are out in force, with Bidstack, Angle, and Heiq all seeing a share price whack.

Profit warnings are generally not welcome to investors, and for traders they can be tricky to trade.

On the last trading day of 2022 Harland & Wolff (HARL) updated the market and said that £20m of revenues would need to be deferred into the first half of 2023. It seems odd that management would only become aware of this literally the day before the financial year end (if you include Saturday on New Year’s Eve), which I feel increased the severity of the announcement.

Maybe they were hoping payment would come through and management could avoid warning, but in the end it comes across as unprofessional. Still, the revenue has been deferred and not cancelled, so as long as nothing else changes the revenue is still there and just booked into another accounting period.

With Bidstack it’s a completely different case:

“After the close of business on 30 December 2022, Bidstack received notice from Azerion purporting to exercise an alleged right to terminate the agreement.  Bidstack has taken appropriate external legal advice and has concluded that Azerion has no present entitlement to end the agreement.  Bidstack now intends to claim damages for unlawful termination.”

The Azerion agreement guaranteed $30 million of revenue across two years. With this now in question, and the company saying Azerion is holding back funds, I decided to liquify what was left of my speculative position and sit on the sidelines.

Angle noted that “Due to the current adverse market conditions, the need across the industry to control expenditure has affected a number of pipeline opportunities with some customers focusing on their nearer term assets with additional buyer caution”. As a result, revenue would be materially below its current market expectations.

Heiq also blamed delays of revenue moving from Q4 2022 into FY 2023. Sometimes it’s what the company doesn’t say that can spook people too. Maybe I’m reading too much into this, but FY 2023 could be any point during the financial year. The company didn’t say it would move into Q1 2023. Why not? Investors are left wondering. Will it? Won’t it? From this RNS it is anybody’s guess.

Here’s the chart for Heiq:

We can see my alert set for 240p that I previously wrote about wanting to trade the stock long. The stock never broke out. I never went long. Instead, the stock flashing warning signs aplenty.

  1. The stock broke below the 200 moving averages
  2. The stock couldn’t rally above the 50 EMA
  3. The stock couldn’t rally above the 200 moving averages
  4. The stock had already warned so clearly there was trouble
  5. The company had a PE of 20+

Sometimes avoiding bad stocks is as easy as heeding the red lights.

It’s also avoiding throwing good money after bad.

This is the difference between investing and trading.

And it’s why a short term trade goes into the long term investment bracket should it go wrong.

Investors and traders think differently.

Investors are looking to buy the business at an attractive price. Therefore, if the price falls, then it becomes an increasingly attractive investment (assuming the business prospects haven’t changed and the price hasn’t fallen due to a profit warning).

Traders are looking to efficiently move capital in and out of stocks to generate capital growth.

Running losses means that it’s exponentially harder to recover the bigger the losses are, so the trader’s interest is in keeping those losses as small as possible.

My biggest losses all have several commonalities:

1. I broke my rules

This is my own fault. For whatever reason, I decided to operate outside of my usual rules, and paid the price for it. This is going to happen unless you’re a well-programmed robot (I am not a well-programmed robot) and so you just have to accept it.

Try to minimise your mistakes but also don’t beat yourself up over mistakes. If those mistakes are big and you’re repeating them, you need to sit down and work out what is causing you to repeatedly throw money away.

2. Buying stage 4 stocks

Charts like HEIQ – where the price has rolled over and is downtrending – are never a good buy for a trader. You’re gambling that you are printing the bottom, and what are the chances of that?

It’s far better to buy at a higher price when the upward trend is intact rather than gamble. The stock market is an expensive place to treat it as a lottery.

3. Buying stocks with deteriorating fundamentals

I scan the fundamentals of stocks I buy if they are a trend trade. For intraday stocks I don’t much care about the business, but on a long term trend it matters. If there are obvious signs things aren’t going so well and are likely to get worse, all you’re doing is potentially buying into a profit warning.

4. Averaging down

If you’re a trader, then averaging down is a crime. You may have other opinions, but the only way to avoid losses getting bigger is to cut them – and not throw more money at them. That much is a fact.

It’s worth having a look at your trades throughout 2022 if you haven’t done so already and work out what the common traits between your winners and your losers are. Once you’ve done that, you’re then in a position to act on them.

Michael Taylor

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Twitter: @shiftingshares

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