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MARKET COMMENT
By
Carburton Street, London -- I first came across the "Cockroach theory" when I reviewed the book The Secrets of Investing in Technology Stocks. The theory asserts that if you see one cockroach, then there are probably a whole lot more around. Just because you haven't seen them yet, it doesn't mean they're not there. Applied to the business world, it means that if one piece of bad news leaks out then there is a high probability that more bad news could be just around the corner. Similarly, if a particular sector is in trouble, other players in the sector could be in the same mess. This morning we saw evidence of the cockroach theory in play when recruitment company MSB International (LSE: MSB) delivered a downbeat trading statement. The company said it had noted comments made recently by other companies in the market regarding tight trading conditions and advised shareholders that it is experiencing a similar trend. Yesterday, Michael Page International (LSE: MPI) warned of the uncertain outlook in most of its markets and said this made it particularly difficult to forecast business levels for the second half year. Robert Walters (LSE: RWA) hasn't warned yet, but the market has already factored into the share price an imminent warning. Stock analysts are particularly fond of the cockroach theory and will apply it at the drop of a hat. Marconi (LSE: MONI) is the latest victim of their assaults: analysts have been arriving in their droves to further cut their predictions for the company based simply on its membership of the telecomms equipment sector, despite the fact that Marconi released a trading statment only three weeks ago setting out its own view of the future. The business environment, especially for high growth companies, is a tough one to gauge and investors presented with the need to understand it are faced with a huge problem. Whilst the cockroach theory does have some merits, it is much too easy to use it without careful consideration of other factors -- which is very unFoolish.
More: Investment Strategies discussion board. The author owns shares in Marconi.