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Why investors are smashing some top stocks


What can a maker of colostomy bags tell you about the current state of the stock market? Quite a lot, as it happens.

Convatec, which apart from products to deal with incontinence also makes wound dressings and skincare treatments, came to the market just under a year ago.

The Reading-based company, which employs 8,500 people in more than 100 countries around the world, raised nearly £1.5bn in an issue which valued it at £4.4bn.
That made it the biggest flotation on the London Stock Exchange in 2016 and the issue, months after the Brexit vote, came as a considerable fillip to the City at a time when a lot of companies, including the waste management firm Biffa and the fitness chain Pure Gym, were deciding against coming to market.
Chaired by Sir Christopher Gent, the highly respected former chief executive of Vodafone, there was a willing market for the shares.
The flotation, which had been priced conservatively, was oversubscribed – that is to say, there were more buyers for the shares than there were shares available – and two months later, the company was admitted to the ranks of the FTSE-100.
Things went swimmingly to begin with. Convatec’s first results as a listed company, released in March, disclosed a 2.3% rise in annual sales with full-year earnings before interest, taxation, depreciation and amortisation (ebitda) rising by 7.1% to a better than expected $508m.
And there appeared to be a good investment story for shareholders to get behind. Paul Moraviec, the chief executive, spoke about how the company aimed to be “the innovative global leader in medical devices for chronic care” by launching new products into existing markets and by entering new markets.
At the results presentation that day, he told investors: “Our chronic care space sits at the sweet spot of global healthcare trends. Our markets are large, growing and structurally strong.
“We enjoy high degrees of recurring revenues. And our research and development process is highly efficient, as we don’t require high cost, high risk trials.
“We’re looking forward, where we see lots of opportunity, with a strong pipeline of new products and still plenty to come from our margin-improvement programme. So we’re confident about the year ahead.”
Accordingly, the shares, priced at 225p each in the flotation, rose to as high as 349.1p in June this year – valuing the company at £6.8bn.

On Monday, though, the picture looked quite messy.
Convatec warned that sales will now grow this year by between 1-2%, rather than the previously expected 4%, thanks to a combination of factors.
These include production backlogs created by moving two manufacturing lines from Greensboro in North Carolina to the Dominican Republic; a loss of orders resulting from a failure to clear a previous backlog, partly due to hurricanes in the Caribbean and lower-than-expected sales of new products.
Shares of Convatec have fallen 21% on the news, a huge fall for a Footsie company in a single day, taking them below the flotation price.
As Michael Jungling, an analyst at investment bank Morgan Stanley, put it: “(This) somewhat undermines the equity story set out at the time of the IPO last year.”
But the violence of the share price reaction tells you something else. Stock markets this autumn have been very strong.
The three main US indices – the S&P500, the Dow Jones Industrial Average and the Nasdaq – have regularly been hitting new records. So too, last week, did the FTSE 100 in Britain and the DAX in Germany. Even the Nikkei in Japan has just hit its highest level for 21 years.
Yet a lot of professional investors are wary of the rally. Interest rates are already rising in the US and are likely to in Britain before too long.
Even the European Central Bank may begin to tighten monetary policy before long. This means that, with the era of cheap money coming to an end, equity valuations are going to be have to be underpinned more than ever by strong company earnings.
And so when a company disappoints on earnings unexpectedly, as Convatec did on Monday and the engineering group GKN – a fellow Footsie member – did on Friday, their share price is going to get smashed.

Source: SKY