The short term movements of share prices can be very difficult to understand. Sometimes they rise when the outlook for a company is poor (but not as poor as was previously expected) and other times they fall even though a company has posted record-breaking profits. As such, Ben Graham perhaps summed it up best when he said that ‘in the short run the market is a voting machine, but in the long run it is a weighing machine’. In other words, sentiment may matter in the short run, but quality shines through in the longer term.
For example, the share price performance of digital inkjet developer, Xaar (LSE: XAR), is rather surprising. That’s because it has risen by 38% since the turn of the year despite Xaar being forecast to post a fall of 35% in its earnings for the full year. Certainly, Xaar is expected to improve on its performance next year, with net profit growth of 12% being pencilled in, but even if it meets its current guidance its shares still trade on a relatively high forward price to earnings (P/E) ratio of 26.9. As such, they appear to be worth avoiding even though they are up by a further 6.5% today.
Meanwhile, the share price of fashion company, Mulberry (LSE: MUL), is also somewhat surprising. It fell heavily in 2012 and 2013 as its strategy of increasing prices backfired and many of its loyal customer base switched to what were perceived to be better value products. However, under a refreshed strategy, Mulberry is now forecast to reverse the slump in its profitability, with net profit forecast to treble this year and rise by 2.5 times next year. Despite this, Mulberry’s share price has only risen by 9% since the turn of the year and, with it trading on a price to earnings growth (PEG) ratio of 0.4, it seems to be worth buying.
It’s a similar story with delivery services company, DX (LSE: DX). It had a difficult year in 2014, posting a pretax loss of £55m. However, it is due to reverse this in 2015, with a pretax profit of £26m being forecast and, while profit growth of 4% next year is rather pedestrian, DX appears to be worth more than its current share price. That’s because it trades on a P/E ratio of just 7.9 and, furthermore, offers a yield of 7.1% at the present time, with dividends being covered 1.8 times by profit. As such, it appears to offer a potent mix of value and income potential that make it an appealing buy.
Of course, not all share price movements are so difficult to understand. For example, online advertising company, Blinkx (LSE: BLNX), has seen its share price fall by 86% since the start of 2014 as the company has moved from being a highly profitable business into a loss-making one. And, while Blinkx is currently transitioning its business model to mobile and is restructuring its marketing, divisions and wider product offering, a lack of profitability is likely to hold it back over the short to medium term. And, with further losses expected in the current year and next year, further weakness could lie ahead for Blinkx.
However, with a dirt cheap valuation (it trades on a price to book ratio of just 0.75) and a cash pile that provides it with the time and space to deliver a more focused offering, Blinkx seems to be worth buying at the present time. Certainly, it is relatively risky, but the potential rewards seem to justify buying with such an uncertain outlook.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.