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

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.

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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.

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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.