SIMON BROWN: Why shares don’t always respond to results

One question I get asked all the time is: why does a share not always respond when great results are released? 

This is because the market reacts to surprises in the short term and valuations over the long term.

If results are expected to be great and they come out great, well, then, it’s just as expected.

This works in the inverse as well. Afrimat put out a bleak trading update, with headline earnings per share (HEPS) expected to be 75%-85% lower. That led to some initial selling, but the stocks closed only slightly down — because the issues were known.

But there are outliers, and these are usually small-cap stocks. The Calgro M3* trading update has a mid-range HEPS of around 100c and this has sent the stock up from 550c at the time of the announcement to 680c as I write. The reason is that the update was a surprise but in the case of a micro-cap such as Calgro M3, it is also a stock that’s well covered and this creates opportunity. I’ve followed the stock for well over a decade and owned it at two points during that time, so I am able to figure out my own expectations.

There are two edges for investors here. The first is that small caps are mostly unloved by private clients and uncovered by major institutions because they’re simply too small. So we can find real value.

But the second edge is important. I first researched and bought Calgro M3 around 2011 and held on for 10-fold profit. But when I sold it in around 2015, I didn’t stop watching the stock.

I read all the results and kept making notes even as the company almost went bust. Many will move on from a stock when results get ugly. My view is that keeping your knowledge of a stock up to date often pays rewards.

With Calgro M3, things started to look better after the lockdown and last year the price action confirmed my bullish view. So I entered again, eight years after my last sale.

This works less well on the large stocks as they’re so well covered and we almost get efficient share prices. But importantly it’s only “almost” — we never get a perfectly efficient market.

Your edge in the large caps is patience and size. Private clients are typically smaller, so entering is easy and usually can be done in one trade on a single day.

Second, every stock will have a sell-off at some point and this often offers opportunity. I like it when the sell-off has nothing to do with the business itself. For example, the tech bear market of 2022 saw local retail stocks also falling. Not as much as tech, but they were under pressure and that made no real sense. So that could be seen as an opportunity.

*The writer owns shares in Calgro M3