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Here’s why this small-cap growth stock plummeted over 30% today

Image source: Getty Images.

The flurry of less-than-impressive Christmas trading updates from retailers continued this morning with fashion brand Quiz (LSE: QUIZ) disappointing the market, resulting in another massive share sell-off.

Tough questions

Revenue rose 8.4% in the six weeks to 5 January, thanks in part to online growth of 34.1%. The fact that sales from physical stores and concessions (a lot of the latter are in Debenhams) grew by only 1.6%, however, shows just how tough things are on the high street, leading management to report that overall sales came in “below expectations“. 

The outlook isn’t great either. As a result of ongoing uncertainty, Quiz saw fit to revise its revenue and earnings forecasts for the full year to roughly £133m and £8.2m respectively — lower than what the market previously expected.

In a further blow, the former isn’t likely to cover the additional employee, marketing and depreciation costs incurred by the company over the last year as part of its growth strategy. Gross margins are also expected to be lower as a result of the “higher than anticipated level of discounting” — something that other retailers have reported on over the last few days. 

For me, there are two points that all investors can take away from all this.

First, today’s reaction from the market underlines just how dangerous it can be for a company to rely too much on one trading period – something that Quiz’s management previously flagged.  

Second, the 87% reduction in the value on the company since last July (and taking into account today’s additional drop) is yet more proof of how risky investing in market minnows in hyper-competitive industries like clothing can be, not to mention the importance of keeping portfolios sufficiently diversified.

On a more positive note, at least Quiz isn’t drowning in debt. The company had a decent net cash position of £12.3m at the end of the reporting period relative to today’s market cap of £33m. One might also argue that the shares — already trading on 7 times forward earnings before today — offer quite a bit of value for those brave enough to buy (although always evaluate your own risk tolerance and investing horizon). 

In sum, Quiz looks cheap but it does have an increasing number of questions to answer.

No exception 

Of course, it’s not just struggling market minnows that have been impacted by the speedy reduction in consumer confidence in the final few months of 2018. Back in December, shares in online fashion behemoth ASOS (LSE: ASC) tanked 40% on a surprise profit warning

But does the decent bounce in its shares since then make it a buy? I’m still wary.

For one, the company still looks too expensive. I said this when the stock was trading at around 5,000p back in October.  It might look a whole lot cheaper today — at almost 2,900p — but each share of ASOS still changes hands for almost 55 times earnings, even if the price/earnings to growth (PEG) is starting to look more reasonable. The behaviour of shoppers over recent months is a sign to be wary of all retailers, in my opinion, but particularly those on still-frothy valuations. 

Sure, ASOS may turn out to be a ‘safer’ bet than Quiz thanks to its lack of exposure to the high street, but it’s worth remembering that no company is worth buying at any price.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.