Academic research suggests company insiders employ a similar approach. They buy in years when their market announcement newsflow is negative, and sell in years when it is positive. This is the same for third-party news. There may of course be other factors at play than simply the profit that can be gained by someone with working knowledge of the strength of an organisation: sometimes, a vote from the top can be an intended prop for a falling share price. The success of this approach for the investor without special knowledge rests on his or her judgment of the seriousness of the issue at hand.
Let us consider some recent examples: Plus500 (PLUS) is a financial trading company that allows its users to make long or short calls on a wide range of market securities via contracts for difference. On 18 May 2015, the company announced that it was in dialogue with the financial regulator about sorting out its anti-money-laundering procedures. Plus500 had to suspend a swath of customer accounts as it gathered the necessary documentation.
One Plus500 customer told me the communication had been "utterly shambolic", and they had decided to open an account with rival IG (IGG) instead. But had you invested in Plus500 the very next day - which was not even the bottom of its fall - you would currently be holding an Alternative Investment Market-listed stock that had increased in value by a fifth, compared with a 5 per cent fall in the Aim 100. Much of that good performance has come in the past couple of weeks as the company has surprised analysts with the strength of its recovery from last year's travails. Much of its customer base were more sticky than the pessimists (your correspondent included) had predicted at the time.
Or let us consider Tesco (TSCO), which gave the market a bit of a shock back on 22 September 2014 when it announced that it had overstated its estimated profits for the most recent half-year by £250m, by accelerating the recognition of its income and delaying the accrual of its costs. Four senior executives were suspended and an internal investigation launched.
Private investors that saw the resulting market rout as an opportunity could have picked up the stock at an 11-year low of 204p. Those that could hold on for bad news to get worse could have bought in at 172p in early October 2014. The later, 'good news' would have been the better-than-expected trading for Christmas 2015, which sparked a relief rally in the shares shortly thereafter. Those with the good fortune to buy at the October 2014 bottom and sell at the April 2015 top saw a price rise of more than 40 per cent, before the company's longer-term competitive challenges and a bearish equity market weakened the stock.
Enough of the hindsight - which are the companies that are still in the mire, with the hope of struggling out? No stranger to bad news is support services company G4S (GFS), which this week announced it was to sell its children's services business, the subject of a BBC Panorama investigation in January, over mistreatment of inmates at a young offender centre in Medway. The treatment portrayed on the programme was indeed shocking, and the company put out a statement the next day saying it was fully supporting the police investigation, with a statement from the managing director of this division, Paul Cook, saying: "there is no place in our business for the conduct shown."
You could make a straightforward moral argument for selling the stock, or at least going nowhere near it. But for those willing to hold their nose, they could have picked up G4S for as little as 191p per share in early February, a level not seen since 2009. At 206p, the share price is currently 12.7 times consensus expectations for its next 12 months' earnings, according to Bloomberg figures. That is within the bottom quartile (below 13.6x) of where that PE has been over the past three years.
Another candidate would be Sports Direct (SPD), which endured a wave of negative press over Christmas, and is pretty cheap, historically speaking, at 10 times expected earnings. Do the governance issues and the tussle between shareholders and founder Mike Ashley obscure an undervalued company? There will be bargains for those wishing to stoop, but, as ever, it is how you pick 'em.
