With a spate of unexpected earnings hiccups hitting the newswires like a hammer at end of the third quarter, lots of investors are understandably concerned about how safe their nest eggs are if theyre tied up in stocks belonging to theFTSE 100 (FTSEINDICES: ^FTSE)index and the wider market.
Thebad vibes all kicked off on 8 September when stockbroker Charles Stanley issued its second profit warning in less than half a year, citing an erosion of its profit margins despite the broad growth in the financial services sector this year generally. Shares of Charles Stanley tumbled 10% on the news.
A week later, on 16 September, fashion retailer ASOSfared no better when it confessed that it expected to earn about 30% less than forecastafter a fire in a warehouse demolished its retail stock whilethe recent increase in the value of the British pound eroded what earnings it had left from overseas sales.
But it was Tesco that really set off the panic attackswhen the groceradmitted that it had overstated its profit guidance by 250m, resulting in the immediate suspension of four senior executives, including the UK managing director. Disappointment would be an understatement, Dave Lewis, the companys one-month-in CEO, wearily conceded.
Have No Fear
But fear right now is a rash overstatement. In fact, things arent that bad at all, least of all withinthe bulk of the FTSE 100 index constituents, where any dips right now should definitely be seen as potential free value if the price is right. Thats because the above-listed concerns, once dissected for what they are, appearvacuous.
And just for the record, economic growth in the UK is actually looking to come in much stronger than predicted at the end of 2014, at 0.8%, according to broad consensus.
Dissecting The Root Cause Of These Jitters
Charles Stanleyisseeingprofit margins erode away just as it admits it is, but what it doesnt say is that is because it isbleeding away its market share. Thats the result of having strong competition. These competitors are for the most partin the form ofFinnCap and Cenkos(the latteris publicly listed on AIM, incidentally).
Let me clarifywhat I mean by competition so you get an idea of why Charles Stanley is such a melodramatic mess on the marketright now.
FinnCap, with over a hundred clients, is now AIMs number one broker in the UK after just eight years in business. It also became a top 10 LSE broker this year, too. Unfortunately for investors, the company is privately owned (by its 95-odd employees, as it happens), for this year the companys revenue surged 36% to 15.5m, while earnings fared similarly. Trading revenues were 80% higher!
Just in case you missed it, thatsthe real reason Charles Stanley is hurting right now.
As for Tesco, I warned investors last week about the fact that management had obviously no idea what was wrong with the company, and even suggested the new CEO might end up selling it off in bits, a fate that right now doesnt look so improbable.
And interms of ASOSs woes, well, a fire in a warehouse can hardly be considered to be the end of the world as long as its a one-off event, and a stronger sterling is part of the consequence of the economy being in such great shape. For companies that are part of the FTSE, thats ultimately a plus.
Grab Some Yield
I haven’t been a great fan of dividend stocks lately, which I think have been sluggish and uninteresting places to put my money compared with other more exciting opportunities. But if you want to snatch up bargains right now, grabbing some free income yield here is a fabulous idea.
Picking some really great dividend stocks inside this temporary period of misguided negativity will likely show your portfolio some outstanding yield come spring next year. That’s why today I’m going to point you in the direction of our great in-house guide on the subject, How To Create Dividends For Life. Click on the link and download it now: in this market it especially makes for great reading!
The Motley Fool owns shares in ASOS, Charles Stanley and Tesco.
