Short term pressure
Shares in diversified food business Real Good Food (LSE: RGD) have slumped by over 20% today after it released a profit warning. It now expects earnings before interest, tax, depreciation and amortisation (EBIDTA) from continuing operations to be flat versus last year, due to lower than expected margins. Clearly, this is disappointing for the company’s investors and has lead to some of them taking their money and running.
The key reason for the reduced margins is the transitional period that the company is currently undergoing. It’s investing heavily in people, products and brand across all of its businesses, and, when combined with other one-off events, this means that profit from continuing operations is set to disappoint.
Looking ahead, Real Good Food’s share price could continue to come under pressure in the short term as the market adjusts to its updated guidance. However, with its shares now being at their lowest since April last year, it may be of interest to long term investors who are relatively less risk averse.
Further downside ahead
Also posting major share price falls thus far in 2016 is online clothing retailer ASOS (LSE: ASC). Its shares are down 8% in the year-to-date and this takes their fall over the last two years to 50%. That’s despite the company making significant improvements to its strategy and business model, including focusing to a greater extent on key markets instead of attempting to expand quite so rapidly into new territories.
While ASOS offers excellent customer service, and a superb range of items that has kept its offering highly relevant and popular among its target market of twentysomethings, its valuation appears to be rather high. Certainly, earnings growth of 23% for the current year is an impressive outlook, but with the company’s shares having a P/E ratio of 56.8, there appears to be a further 20% downside ahead.
Share price in free-fall
Meanwhile, shares in mobile payments solutions provider Monitise (LSE: MONI) have been an even worse place to invest than ASOS or Real Good Food in recent months. In fact, they are down by 11% today and this takes their fall in 2016 to 41% even though the company’s recent update offered hope to investors waiting for Monitise to deliver a black bottom line.
Although the company now appears to have a more disciplined approach to costs and a logical strategy to win customers and turn a profit, it remains some way off that goal. For example, it is due to make a pre-tax loss of £27m in the current year and, with its share price seemingly in free-fall, a further decline of 20% from its valuation could be very much on the cards.
That’s despite the company having an excellent product and a long list of blue-chip clients. As such, it is a stock that may be worth watching but until there is evidence of a step change in its profitability, it may be prudent to look elsewhere for capital gains.
