The Motley Fool

This small-cap stock has just crashed 25%. Here’s what I’d do now

Image source: Getty Images.

If you want to see what a profit warning can do to a share price, look no further than Topps Tiles (LSE: TPT).

The floorings specialist’s shares plunged more than 25% Thursday morning after the company told us that trading in its first quarter to, 28 December had been “impacted significantly by political and economic uncertainty in the run up to the UK General Election.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The first eight weeks of the second quarter were no better, having “remained challenging against a backdrop of continued weak home improvement spending.”

The result is a 5.4% drop in like-for-like sales in the first quarter, followed by a 5.5% dip in the second. Topps now expects full-year adjusted pre-tax profit to be “materially below the bottom end of the current range of market expectations.”

Bullish

That contrasts with soft furnishings retailer Dunelm (LSE: DNLM), whose interim report earlier in February was considerably more upbeat.

Dunelm shares were flying high, and have now gained 29% over the past 12 months compared to a 13% fall for Topps Tiles. But that doesn’t tell the whole story for Dunelm.

Despite no specific news, a couple of days after those first-half figures were released, Dunelm shares suddenly turned downwards again. And since market close on 14 February, there’s been a 20% price fall. There’s even been a 4% drop Thursday as share price contagion spreads. So what’s happening?

In my view, Dunelm has been something of a story stock of late, and folks who wouldn’t have really investigated it have been buying the shares. It’s been successful for sure, especially with its move into online selling. But beneath it all, it’s still a retailer. And we’re still in very tough times for retailers.

Pricey

Dunelm shares have looked overpriced for some time. Though they’ve fallen back, we’re still looking at a forward P/E of 20.5. That’s based on forecasts for the year to June 2020, and earnings growth predictions for the following year would drop it only as far as 19.5.

I think Dunelm is a quality company, and I like buying shares in those. But I won’t overpay even for the best, and I’m still waiting for a better buying opportunity.

Cheaper

Topps Tiles shares had been priced on significantly lower P/E multiples of around 13 to 14, closer to the long-term market average. That’s with a 13% fall in EPS on the cards for the current year, but things are clearly going to be significantly worse than that now.

On that old forecast, the shares would now be on a P/E of around 10. But it’s anybody’s guess what that would bounce back up to when we’re able to put some flesh on the bones of “materially below the bottom end of the current range of market expectations.”

I’ve been mildly positive about the relatively dull nature of Topps Tiles’ business for quite some time, as I really don’t like excitement in the market for consumer products. But at the same time, I’ve never seen the shares selling cheaply enough for me to buy, especially considering it’s a small-cap stock that carries debt.

Until we know the full extent of the latest damage, at least, that stance is not going to change.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.