Stocks in ‘all or nothing’ mode

The corporate Covid narrative is turning into a Netflix drama that just doesn’t know when to quit.

For retail firms living through the topsy turvy tale, the first act was all about managing a head-spinning hit to trade. The next was about navigating the Covid quagmire. Grin and bear it? Slim down operations? Jack up the debt to stay afloat? 

The recovery wasn’t created equal by any stretch of the imagination and, as we hopefully round out the performance in 2022, companies and investors are weighing up the damage.

The past few weeks have shown us it’s not all about who’s got this far though. The market is clearly judging who’s ready to emerge from the whole thing, all guns blazing, and who’s crawling towards the finish line.

And investors are separating the two groups ruthlessly.

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Continue in 10, 9, 8…

Case in point is Warhammer overlord Games Workshop. The tabletop mid-cap firm got a huge boost at the open today after raising its dividend and saying everything was in line with expectations.

The retailer had been in the doghouse with investors over halting fan fiction content and pushing its own monetised sites. And in January GAW highlighted ballooning costs of nearly £5m due to shipping, warehousing and logistics. After a strong lockdown share price performance, life after the depths of Covid was looking less rosy.

That a simple ‘keep calm and carry on’ message was able to lift spirits that high this morning tells us something about how eagerly the market is rewarding stability and watching for signs of weakness among drawn-out Covid casualties.

And, right on cue, the market gave us a pretty clear indication of how it plans to treat firms warning against shaky times ahead.

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What’s Next matters most

Despite results for last year exceeding “all our expectations” UK stalwart retailer Next warned profit and sales will be lower by £10m and sales by £85m in 2022/23. Closing its website in Ukraine and Russia, and a general slowdown in overseas markets were the culprits, with investors punishing the stock today.

A 140% hike in profit before tax to £823m, “record earnings per share”, and a 50% jump in retail sales to £1.5bn weren’t enough to take investors’ eyes off that profit revision.

There are still questions over which retailers will rule the omnichannel roost of online and high street shoppers. The pandemic certainly accelerated our move online but plummeting stocks like Boohoo are a sign we’re not completely convinced real-life shopping is dead. 

Next has a history of innovating when it needs to, nothing flashy but enough to keep it in the mix. But it might be that investors are eyeing up its capabilities and aren’t entirely sure it’s where it needs to be to straddle both channels effectively.

The company’s margins peaked in 2016 at 20%, pretty impressive for a clothing retailer. Investors need to see how it can swap catalogues for app transactions and get back to that level before the stock can really motor again.

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Don’t get drawn into short-termism

These market reactions might not be that surprising. Investors are forward-looking beasts after all. But, as results flow through Q2, the market is telling us it’s much less interested in the ‘hunker down and get through it’ narrative, and much more focused on how companies plan to manage from here on out.

That mental inflection point is likely to stick around at least in the short term. So, miss an earnings target or decrease guidance and you’re probably going to see the rug pulled from under you. Come out on top and stay positive, and you might just get a relief rally.

For individual investors, none of this should take the focus away from those firms with good businesses, low levels of debt, dependable revenue streams and the ability to absorb costs where they need to. Quality is a facet we should never compromise on, especially when the market is resorting to gut reactions.

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