Here they come… the winged ants that swarm ahead of the coming storm… the scouts appearing over the hill, ahead of the advancing army. They are the harbingers. They warn us of what lies ahead.
In the stock market, the harbingers are not rising interest rates. They are not the braying bugles of the professional bears. They are not the gloomy forecasts of economists. They are the words uttered by the businessmen and women who are at the sharp end, and who are running the companies in which we have invested our money.
By nature they are optimists. You have to be in business. They give the glowing presentations that fund managers want to hear. They will never admit that anything will go wrong, or has gone wrong – until they absolutely have to.
The stock market is the place for dreams. When we buy a share we believe that it will do well – really well. We buy a mining explorer – and have visions of it unearthing gold and diamonds by the shovel full. We buy into a retailer – and expect that customers will soon be lining the pavement outside the shop front. We buy into a software company – and we think we have found the next Microsoft.
This is fine. Optimism works. The tendency of the stock market is to rise, not to fall. Those who are bold enough to play the game walk off with the prizes in the end. But still the road is not smooth. Every now and then we are given a shock. It is the stock market’s way of telling us that this is not supposed to be easy. The price of making money is those sleepless nights that we endure when the market is tumbling.
Now the shocks, like the distant rumbles of thunder, are being heard. And they are coming from those business leaders who are having to admit that perhaps things are not so rosy after all.
The City likes to think that it takes a long-term view. It claims to weigh up the strengths and weaknesses of any company and to price the shares accordingly. But when a company shows the slightest sign of weakness the City, like the school bully, pounces and shows no mercy.
That happened last week
Take the case of OCZ Technology (OCZ). This share has been recommended to me time and time again. The shares were, I was told, cheap. Because, when OCZ floated on the stock market back in June 2006, investors were too busy planning their summer holidays to take an interest in a new technology company from California. OCZ was forced to raise the money that it needed at a share price of just 65p.
After that less inauspicious start, OCZ, has staged a fight back. Thanks to a string of announcements and the enthusiastic support of City cheer leaders the share price had, by the start of last week, moved up to 135p. I have met the founder and chief executive Ryan Petersen. He is bright, ebullient and a product of Silicon Valley. He told me of some of the gizmos with which OCZ has wowed techie land.
An ATV Flash Drive in 16GB capacity… a Vindicator CPU cooler and the unique “silver array” CPU water block… the Trifecta memory card, a total flash solution that features Micro SD, SD, and USB-readiness in one unit… the Equalizer mouse which features the OCZ “Triple Threat” button
I read some of the reviews of OCZ’s products and, boy, were they enthusiastic! ‘Mad overclockers will love OCZ PC2-9200 Flex XLC.’ said one. ‘The Silencer 750 Quad CrossFire Edition is perfectly at home in a high-end CrossFire gaming rig and the Ferrari red color certainly has a coolness factor that leaves other power supplies in the dust,’ drooled another. And, in its excitement losing all grasp of the English language, another exclaimed ‘Freakin’ fast, Modules crave voltage, Developed by a true enthusiast, Ti Alpha spreaders look amazing.’
I don’t understand a single word of this. And nor, I dare say, do many people in the City. But what they do understand are the few words delivered by OCZ last week. ‘A significant fall in the DRAM spot market’ it admitted ‘has contributed to lower than expected revenues, gross product margins and profits.’ Wham! In the blink of an eye the share price halved. One moment OCX was worth £60m, the next it was worth £30m.
This is the way the City reacts to a profit warning. And OCZ is not the only one to have received the treatment. William Ransom (RNSM), Metnor (MTG), and Johnson Service Group (JSG) are three others. Their share prices have fallen by 40% to 60%.
There will be more. This is why investors’ nerves are taut. And why it is time to batten down the hatches.
This article is taken from Tom Bulford’s free daily email ‘Penny Sleuth’.