Shares digital

Picture a company. An ordinary company, quoted on an ordinary stock market. But while the results are good, the shares go down. You have just entered the ‘Twilight Zone’. The way the market is behaving at the moment it could easily be performing to a script from the pen of Rod Serling, the 1950’s sci-fi legend.

As eagle-eyed analysts at investment bank ABN Amro pointed out this week, recent stock market performance patterns do not seem to 'fully reflect the material changes to the macro backdrop or the forecast revisions that have followed full year 2007 results.’

Figures released early this week seem to underpin this view. Of the ten or so sets of results issued on Tuesday morning the share prices of Amec, the building services-turned-oil infrastructure firm, and engineering group Cookson, slumped. Now, you might say that there is nothing terribly out of the ordinary in this. But what did strike me as strange was that both companies managed to produce increases in sales and earnings, with EPS rising a hefty 68% and 28% respectively. Of course, other factors besides headline figures affect the direction of share prices, and no doubt Cookson’s pretty gloomy view of its near term prospects, in particular, weighed heavily on the minds of investors.

But these were not isolated incidents and similar share price falls were in evidence on Monday too, in spite of many of the 25-odd results released showing raised figures. ABN Amro seems to believe that background noise is booming louder than individual sounds coming from companies, even when those sounds are relatively upbeat. ‘In the barrage of micro and macro newsflow of recent weeks, some price moves appear to contradict the results season message,’ it says. ‘Industrials have performed relatively well while suffering material EPS downgrades post numbers. In contrast telecom weakness looks difficult to reconcile with robust forecast trends.

‘Financial asset prices have moved sharply as investors grapple with an increased likelihood of recession in the US,’ adds ABN. ‘Alongside equities, government bonds, credit spreads, currencies and commodity prices have undergone material adjustments over recent weeks, leaving the European corporate sector facing tougher operating conditions.’

The point is, with the market still trying to find its feet on shifting ground, company bosses are finding it increasingly difficult to get even positive messages across.

Oil services firm Petrofac is a good example. It produced a net profits hike of 56.9% to $188.7 million, about $13 million – or over 7%, above the expectations of analysts, while revenues jumped an impressive looking near 31% to $2.4 billion. This boiled down to a 56% increase in earnings, allowing the firm to pay a dividend per share worth 16.4 cents, a staggering 86% higher than this time last year.

OK, but is this all sustainable? Can Petrofac continue to deliver while so many other firms are faltering? Well, judging by its orderbook, up 6.4% to a whopping $4.4 billion, I’d say so, wouldn’t you? The company certainly believes so, saying that its market remains strong and the company expects strong demand for its services ‘for several years to come’.

But let’s put this into perspective. Based on 2008 estimates the shares are trading on a current year PE of about 18 times. Not really cheap, but below its own historic levels of around 20 to 22, and less than others in its sector. Expro International currently trades on about 22 times.

‘The outlook is strong with further awards anticipated in engineering and construction, growth at higher margins in operations services and significant activity expected in energy development,’ says ABN.

But let’s get another view. Analysts at broker Seymour Pierce also called the figures ‘strong’, although they also point out what could be an impediment to growth going forward – quality staff. Yes, among the firm’s biggest threats comes from it being so successful – it has to take on more and more skilled people to deal with the increased workload. Now I don’t know about you, but to me it seems like Petrofac is in a pretty good place if skill shortages are among its biggest obstacles. So, given this backcloth, how high did the shares jump? Well, they didn’t, they fell 38.5p, roughly 7%, to 527.5p.

An anomaly? Quite possibly. After all, anomalies are hardly new. While there has always been plenty of academic evidence to support the theory that the stock market is highly efficient, there have been scores of studies that have documented long-term historical anomalies in the stock market that seem to contradict the very foundations of the efficient market hypothesis. While the existence of these anomalies is well accepted, the question of whether investors can exploit them to earn superior returns in the future is subject to debate. As economist John Maynard Keynes so eloquently put it; ‘Markets can remain irrational longer than you can remain solvent.’ There is also no guarantee that just because various anomalies have existed in the past that they will continue to do so in the future. In truth, we can’t be sure. So remember the words of Albert Einstein: ‘Only two things are infinite, the universe and human stupidity, and I am not sure about the former.’ So stayed tuned, the stock market has another episode of the ‘Twilight Zone’ coming up right after this one.