I reckon there’s a bull market coming. “I can feel it in my water”, as a wise old gentleman used to say when I worked with him years ago. And there’s one thing I can do right now to position my portfolio to take advantage of market strength when, and if, it arrives. More on that later…
The bear is still around (for now)
But, right now, many stocks are plunging. One casualty this morning is Games Workshop (LSE: GAW), the fantasy miniatures company. As I write, the share price is down almost 14% in just one day — ouch!
However, the business is known for its well-defended position in the market and its impressive quality metrics. So what sin has this high-class enterprise committed today to cause the fall? It released an update and said trading has been “in line” with the directors’ expectations!
Surely that’s a good thing, we might argue. So why has the price plunged as if the directors uttered the uncomfortable words, ‘below expectations’? Perhaps it was the lacklustre outlook statement. The firm said: “We remain focussed on sales growth and cost management.” And that’s a bit trite because it’s what all businesses should be doing all the time anyway — it tells us nothing.
But the first quarter profit before tax of £39m came in lower than last year’s £45m. The directors blamed an increase in costs. And the stock market has a bearish bias just now. So negative news from companies tends to be punished severely. And anything less than upbeat and positive seems to be viewed with suspicion. I reckon that’s what happened with Games Workshop today.
Growth has disappeared
But one of the biggest problems with the stock is its success in the last bull run. It really took off at the end of 2016 to give its shareholders multi-bagging returns until it began falling in 2021. Impressive annual growth in earnings drove the price. But so did investor enthusiasm causing a big valuation re-rating higher.
And it’s that elevated valuation that is unwinding now, with good reason — the business has gone more or less ex-growth. And it remains to be seen whether that’s a temporary phenomenon or something more enduring. With the share price near 6,090p, GAW is down around 45% over the past year.
The stage is set
Yet not all stocks have been falling over the past few days and weeks. Many had already plunged previously and are beginning to turn upwards. In most cases, that’s because recent results statements have shown the underlying businesses are in better shape than expected.
I think there’s a huge opportunity in the current situation. The bear has knocked the froth from valuations setting the stage for the next bull run. And the one thing I can do to help turbocharge my returns from stocks and shares over the coming months and years is to focus on valuation now.
However, all shares carry risks, even those with a low-looking valuation. Nevertheless, I’ve been buying shares lately when I see tempting prospects and modest prices. But, so far, Games Workshop isn’t among them.
