08 Apr | EMIS Group
Sometimes a market over-reaction to news creates the perfect buying opportunity for the shrewd investor but what constitutes an over-reaction? Whilst it’s not always evident without the benefit of hindsight, there’s certainly an observable outcome over time – a steep dip in price followed by a leisurely stroll back up to where the market was before the news. Our job as investors is to recognise these drops for what they are – and short them down if that’s our thing – or pick the turning point and ride them back up to where they began.
Here’s one we prepared earlier:
The EMIS Group (three month chart above courtesy of SharePrice.co.uk) is the UK’s leading supplier of clinical software and related services to GP practices and other healthcare practitioners and a major software supplier to high street pharmacies (text borrowed from EMIS).
On January 24th of this year they produced a trading update which contained the following:
Group revenues for 2012 are expected to be not less than £86 million (2011: £73.2 million) with the accelerated roll out of EMIS Web proceeding to plan and RX Systems, the Group’s community pharmacy division, delivering a strong performance. This was partially offset by lower than planned revenues from the Australian defence contract, training and integrated care services. Group adjusted operating profit is expected to be marginally below analysts’ expectations, largely as a result of the accelerated staff and recruitment costs associated with the EMIS Web roll out and the slight revenue shortfalls highlighted above.
The trigger to the price reaction lay in the last sentence in the statement above. Investors often run for hills when they read three little words, “below analysts’ expectations“. In the case of EMIS Group, their Trading Statement from 24th January 2013 included that loaded term and investors, Pavlovian-like, made for the hills.
As a result, the price of EMIS shares dropped from north of 900 pence to below 650 pence.
As someone who’s been following EMIS northerly trajectory closely for some time – with the view of adding a a few of them into my portfolio when and if the price was right – the news was good news indeed. Now I’m no shrewd investor, as my bank balance will attest, but a solid company, with a great revenue model, expanding customer base and a wad of cash in the bank would need to mess up pretty badly to shed the best part of a third of it’s value in the space of a month or two.
In the same period EMIS CEO, Sean Riddell, announced his retirement but will remain on the Board as a non executive director to ensure, “the retention of his sector experience”. The price drop had largely bottomed out before this news was made public.
Granted, there was lower than expected revenues from the Australian defence contract but accelerated staff and recruitment costs associated with a roll out should be seen as necessary business expense in line with expansion. If anything, a positive piece of news, though when bundled in with “below analyst’s expectations”, it takes on an almost negative connotation.
So was it an over-reaction by the market? Time will tell. Anyway, I saw it as an opportunity to take a little tranche at 670 pence (the spread was 50 pence but that’s a whole other story) with a target of 900 pence.
Like with a good insurance company I’ve limited my risk with a stop at 750 pence to lock in some profits should the price retrace a little.
EMIS currently trade at around about 800 pence so I’ve a little way to go to meet the target I’ve set but I’m confident they’ll be back there within months.
As a investment tactic it’s hardly ground-breaking. It’s taking advantage of the fickle nature of the modern investor whose investment time-frame is more likely to be measured in days and weeks rather than months and years. Thanks again for dropping by.