- An expanding addressable market but with risks
- Lumpy earnings growth makes an analyst's task challenging
A stock with a very strong history can appear attractive, but core drivers and market dynamics can shift and substantially alter the investment proposition – never drive looking only in the rear view mirror. Similarly, always tread more cautiously around a very small player in a big market where the winning and losing of large contracts can make profits highly volatile. Returns could prove large but the investment in such businesses remains highly speculative. Our stocks this week help illustrate important lessons in risk and changing fortunes.
Volution (FAN) – this is an industrial machinery/building materials company with an impressive trading history driven by the triple tailwinds of strong construction output, a tightening regulatory environment and using its strong cash flow to fund a lot of acquisitions. Recent interim results were positive with an expansion of the adjusted operating margin and adjusted operating cash flow; statutory profit before tax of £29mn was up 28 per cent on the same period a year earlier. Construction activity has arguably flipped to a headwind, however. While the impact of regulation remains positive, this was always a gradual burn and is slowly maturing. It is important not to be drawn in by a stock's strong trading history when the dynamics for the business have shifted.