Another day, another profit warning ...

[moorfield]

Another FTSE100 dividend payer SP crashes on a profit warning. Today it is Sage's (SGE) turn, by some 15%, moving the yield from 2.4% to 2.6%.

http://www.cityam.com/283936/sage-sales ... consistent

Is it just me or do market reactions seem much sharper in recent times? - perhaps it’s all those pesky algos at work ...

Anyway I've held SGE for several years and am not overly concerned yet. It has been, and still is, well out of range for top ups while it pays the dividend. But offered as a case study of when one might dispose of low yielders - the opportunity was there in January when it was yielding just under 1/2 of FTSE100 about 2.0%

[idpickering]

Not one for me I must admit, and I can hardly say it's the lower yield on offer as a reason, as I added Reckitt to my HYP this week. Sage seems risky to me. This TMF writer has a view on them here;

Is dividend stock Sage a top FTSE 100 buy after 10% share price slump today?

Shares of FTSE 100 accountancy software firm The Sage Group (LSE: SGE) were down by 10% this morning, after the company warned that full-year sales would be lower than expected.

It’s the second disappointing update this year from the firm. Investors rushing for the exit have now pushed the Sage share price down by nearly 30% from January’s high of 825p.

What’s gone wrong?

https://www.fool.co.uk/investing/2018/0 ... ump-today/

[idpickering]

Trading update for the six months ended 31 March 2018

Summary

‒ H1 18 organic revenue growth results were below management's expectations, reflecting inconsistent operational execution;

‒ Organic revenue growth of 6.3% (H1 17: 7.4%) was impacted by two factors: a decline in recurring revenue growth to 6.4% in H1 18 (H1 17: 11.1%) and contract licence slippage in the enterprise segment. Software subscription growth was 25.3% (H1 17: 30.6%). Software and software related services (SSRS) growth was 7.1% (H1 17: decline of 7.3%);

‒ The market opportunity for Sage, as outlined at Capital Markets Day 2018 (CMD), remains unchanged;

‒ Operational execution for the majority of geographies remains robust, with increasing focus on driving recurring revenue growth;

‒ Continuing momentum in Sage Business Cloud, with ARR of over £335m, growing at 57%;

‒ Double digit growth in North America, reflecting continuing progress across US, Canada and Sage Intacct;

‒ Organic operating margin of 24.5% (H1 17: 25.3%) in line with management expectations;

‒ Strong cash conversion of 95%, reinforcing business model fundamentals;

‒ FY18 guidance revised from around 8% organic revenue growth and around 27.5% organic operating margin to around 7% organic revenue growth and around 27.5% organic operating margin.

https://www.investegate.co.uk/sage-grou ... 00027978K/

[monabri]

The market does seem to overreact. Look at what happened to Micro Focus recently. I can only imagine that the algos take over as you say. For the HYPer, it does present opportunities IMHO.

[Walrus]

The market does seem to overreact. Look at what happened to Micro Focus recently. I can only imagine that the algos take over as you say. For the HYPer, it does present opportunities IMHO.

Though I agree with you, I didn't pick this one up as I didn't know enoughh about the company amd hadnt looked at it previously so didn't pull the trigger on it. Something like Conviviality however would have wiped out your investment if you had employed a similar strategy to invest when something is thought to be oversold so caution must be exercised.

[Arborbridge]

The market does seem to overreact. Look at what happened to Micro Focus recently. I can only imagine that the algos take over as you say. For the HYPer, it does present opportunities IMHO.

Though I agree with you, I didn't pick this one up as I didn't know enoughh about the company amd hadnt looked at it previously so didn't pull the trigger on it. Something like Conviviality however would have wiped out your investment if you had employed a similar strategy to invest when something is thought to be oversold so caution must be exercised.

If the yield is 2.6%, as someone mentioned, why would you pick this one up for a HYP?

Down as low as that, one can pick up many shares, not to mention ITs at a higher yield so to my mind it is irrelevant for a HYP, for the moment.

Arb.

[idpickering]

The market does seem to overreact. Look at what happened to Micro Focus recently. I can only imagine that the algos take over as you say. For the HYPer, it does present opportunities IMHO.

Though I agree with you, I didn't pick this one up as I didn't know enoughh about the company amd hadnt looked at it previously so didn't pull the trigger on it. Something like Conviviality however would have wiped out your investment if you had employed a similar strategy to invest when something is thought to be oversold so caution must be exercised.

If the yield is 2.6%, as someone mentioned, why would you pick this one up for a HYP?

Down as low as that, one can pick up many shares, not to mention ITs at a higher yield so to my mind it is irrelevant for a HYP, for the moment.

Arb.

I must admit that I agree with you Arb. Ordinarily they (Sage) wouldn't even pass my initial screening, so wouldn't even be a possibility. I mentioned Reckitt earlier on, and even bringing them on board I was unsure. What swayed it was that I could get a quality company on board at a reasonable price, and an ok yield for that share. A few months ago, they wouldn't have got a look in either.

Ian.

[moorfield]

If the yield is 2.6%, as someone mentioned, why would you pick this one up for a HYP?

You wouldn't now, of course. Which is why, anticipating such a response, I made a point of writing

But offered as a case study of when one might dispose of low yielders

I acquired this holding nearly 10 years ago at an average cost of 210.6p, and it contributes 2.1% of overall portfolio income currently, so has a long way to fall yet before I begin to notice the pain.

[Walrus]

Though I agree with you, I didn't pick this one up as I didn't know enoughh about the company amd hadnt looked at it previously so didn't pull the trigger on it. Something like Conviviality however would have wiped out your investment if you had employed a similar strategy to invest when something is thought to be oversold so caution must be exercised.

If the yield is 2.6%, as someone mentioned, why would you pick this one up for a HYP?

Down as low as that, one can pick up many shares, not to mention ITs at a higher yield so to my mind it is irrelevant for a HYP, for the moment.

Arb.

I must admit that I agree with you Arb. Ordinarily they (Sage) wouldn't even pass my initial screening, so wouldn't even be a possibility. I mentioned Reckitt earlier on, and even bringing them on board I was unsure. What swayed it was that I could get a quality company on board at a reasonable price, and an ok yield for that share. A few months ago, they wouldn't have got a look in either.

Ian.

Sorry I was referring to the recovery of Microfocus rather than Sage. I will try and be clearer in future

[monabri]

[

If the yield is 2.6%, as someone mentioned, why would you pick this one up for a HYP?

Down as low as that, one can pick up many shares, not to mention ITs at a higher yield so to my mind it is irrelevant for a HYP, for the moment.

Arb.

The yield on Micro Focus was nearer 3.5% but what attracted me was the CAGR history for the dividend.

[idpickering]

Sorry I was referring to the recovery of Microfocus rather than Sage. I will try and be clearer in future

No worries Walrus.

Ian.

[NeilW]

I wouldn't buy SGE at the current yield, but I did pick them up in 2012 at just over 4%.

If you look at the results they are talking about lower earnings *growth*. Given practically everybody already uses Sage for their accountancy and it is a FTSE 100 company, what you have here is a firm moving from growth to cash cow.

Sage throws off cash like no tomorrow, and few firms can do without its products. There are few competitors in its space.

It's a strong hold if you picked them up cheap. And it is one to keep an eye on if the price drops down to the 4% yield level.

[bluedonkey]

At the smaller end of the accountancy bookkeeping software market, Sage are getting blown away by new entrants such as Xero. Sage's payroll software is also pants and ridiculously expensive, again far superior new entrants are killing that golden goose.

[NeilW]

At the smaller end of the accountancy bookkeeping software market, Sage are getting blown away by new entrants such as Xero. Sage's payroll software is also pants and ridiculously expensive, again far superior new entrants are killing that golden goose.

They don't make their money at the tiny end of the market. They make their money in areas that need to hire skilled staff, and most of them have Sage skills.

[bluedonkey]

The FT seemed to think that competition from the likes of Xero were affecting Sage's results.

[richfool]

Smith and Train both holders of Sage:

Shares in Sage (SGE) have slumped as the business software provider cut growth forecasts following slowing subscription growth, dealing a blow to big fund manager backers Terry Smith and Nick Train.

Shares in the business were on course for their worst day in 25 years, falling 12.9% to 585.4p, as investors digested guidance of 7% full-year organic revenue growth, down from the previous forecast of 8%.

Citywire AAA-rated Terry Smith's £13.4 billion Fundsmith Equity is the largest single fund investor in Sage, according to Thomson Reuters data.

Smith held Sage in his fund since 2014, although the stock lies outside his top 10 holdings.

The software provider meanwhile accounts for 5.8% of Citywire AA-rated Nick Train's £4.8 billion Lindsell Train UK Equity fund, and 5.7% of his £1.2 billion Finsbury Growth & Income (FGT) investment trust. Both are top 10 positions

http://citywire.co.uk/money/sage-slump- ... e=readmore

[Gengulphus]

Is it just me or do market reactions seem much sharper in recent times? - perhaps it’s all those pesky algos at work ...

It doesn't need "algos" to explain rapid reactions to bad news - people are more likely to react quickly by selling than by buying, as they'll generally notice bad news about a share they already own more quickly than bad news about a share they don't own, and 'knee jerk' selling (i.e. an "uh-oh... better get out quick" reaction) when they do see it seems quite likely to me, whereas 'knee jerk' buying doesn't seem so likely. Not saying that people won't react to bad news by buying - some will, on the basis of trying to exploit market overreactions - but to make a success of that requires one to consider whether a price drop actually is an overreaction, i.e. whether the price has fallen by more than the bad news really warrants. And considering a question like that takes time...

Also, where does one place long-lasting orders that automatically react to price changes, such as stop-losses? They'll react at much faster than human speeds, but the basic selling decision that they represent is made by a human, not by an algorithm - essentially, they use computer assistance to implement that decision more reliably and quickly (though less intelligently) than the human could themselves rather than to make the decision. So are they human? Or algo?

Regardless of the answer to that question, though, I think they'll contribute to the "sell reactions are faster than buy reactions" phenomenon that I comment on above. Long-lasting orders that react to price falls exist in both selling (stop-loss) and buying (limit buy) varieties, but everything I've seen says that stop-loss orders are much more popular among individual investors than long-lasting limit buy orders. The preponderance that suggests of stop-loss orders over long-lasting limit buy orders won't initiate a significant price fall, of course, but if one does develop, such a preponderance will amplify it.

Anyway, whatever the explanation, something like the pattern of Friday's intraday price changes for Sage - a rapid fall for the first half hour or so of trading followed by a slower and less steady recovery of a substantial portion of the fall - is quite a common stockmarket response to bad (but not terrible) news from a company. And at least to my mind, the tens-of-minutes timescale of that pattern suggests it's driven by human responses rather than algorithmic ones, because I would expect patterns driven by algorithmic responses to play out much more quickly...

Gengulphus

[NeilW]

The FT seemed to think that competition from the likes of Xero were affecting Sage's results.

It'll definitely affect the growth rate, but it won't affect the incumbent population. Changing accounting tools is near impossible.

It's the same argument that vaping affects BATS growth - and the BATS steps in and buys up vaping businesses. Sage will no doubt do the same thing at some point - once it stops pretending it is still a growth business.

[Pendrainllwyn]

The stop-loss argument makes sense to me.

I wonder if another reason why markets react more quickly to bad news than good news is that investors may consider that bad news undermines their original investment thesis and sell 100% of their holding. For good news, whilst the investment may be now much better than originally thought, the investor may be already fully invested and have no spare funds to add to their position. Even if they do have spare funds the position may already constitute a reasonable weighting in their portfolio (especially after reacting to the good news) so the investor may not want to add more shares and make it an even bigger weighting and if they do add they may be more likely to add incrementally than add another 100% to their holding. So the seller on bad news may be more aggressive than the existing holder buyer on good news.

This is purely speculation on my part but if true, new investors who weren't closely watching the stock need to come in and buy and they may take time to observe the news, research the stock and make the investment decision. Whatever the reasons, I think that good news does sometimes present an opportunity to the existing investor to add to their position before the market fully reacts.

[bluedonkey]

The FT seemed to think that competition from the likes of Xero were affecting Sage's results.

It'll definitely affect the growth rate, but it won't affect the incumbent population. Changing accounting tools is near impossible.

It's the same argument that vaping affects BATS growth - and the BATS steps in and buys up vaping businesses. Sage will no doubt do the same thing at some point - once it stops pretending it is still a growth business.

Hi Neil,

I have no doubt you no more about Sage as an investment than I do. I've never held. However, Sage has a dreadful reputation amongst accountants which is why the new nimbler entrants like Xero are growing so fast. Changing accounting tools is not near impossible - I've done it!

However, Sage has been like this for years and yet continues to post good results, so I have no idea what happens next.

Best,
Bluedonkey