Today Gooch & Housego (GHH), a photonic components manufacturer, held its Annual General Meeting in Ilminster, Somerset. I would have attended as a shareholder except the time of 11.00 am would have meant a very early start. As it was, the trading update issued in the morning prompted me to sell my holding anyway.
The key negative in the announcement was this: “Looking forward, we believe timing and mix will result in a FY 2019 group trading performance showing low single digit growth compared to last year”. That compares to analyst’s prior forecasts of revenue growth of 14% and adjusted earnings growth of 48%. The share price promptly fell by 20% to about 1100p in the morning and it had already been falling in the last few weeks from a peak of over 1800p in October 2018.
Apart from the well-known problems in China of the manufacturing sector, the cause of the problem is assigned in the announcement to the cyclical nature of the microelectronics sector and the recent impact of the US/China tariff wars. It also comments on the “excess inventory” in the Chinese market taking longer than expected to normalise. However, the company does expect a “multi-year growth phase” in the hi-reliability fibre couplers market which may become apparent in the second half of the year.
But my experience tells me that electronic component manufacturers are notoriously vulnerable to wide swings in volumes and profits. If they are not selling in cyclical markets, or are vulnerable to stock holding changes, they are vulnerable to rapid product obsolescence and leapfrogging by competitors. This is normally a sector I avoid for those reasons. GHH seemed to be operating in a very specialised part of the market which I thought might make them less prone to these problems, but it seems not.
This is a case where my prejudices against a certain market sector are reinforced. Such companies need to be very cheap but Gooch & Housego has not been recently, being perceived as a high-growth tech stock with big ambitions.
The other concern is that the share price decline from October last year was not based on any published news from the company, although the fact that the CFO was declared as leaving in November might have been perceived as such. But in October 2018 the company said: “Overall G&H has a robust order book combined with greater diversification. The Board remains confident that the Group is well positioned to continue to deliver further progress in FY2019 and beyond”.
It would seem that some folks knew about possible problems at the company before me which always makes for tricky investment. With a relatively small shareholding which I had only held for a short time, it’s an example of when it’s best to sell and take a loss. The business might recover but such an experience tells me that it’s always likely to be vulnerable to such shocks.
The electronic hardware sector will therefore continue to be on my blacklist of sectors to avoid which includes oil/gas exploration and production companies, mining exploration, banks and other financial sector companies, insurers, gaming companies, fashion retailers, drug developers, etc, etc. You might call me opinionated but experience tells me that some sectors are just too tricky to invest in unless you have very specialised knowledge. I’ll probably be giving my reasons in detail for avoiding some sectors in a book I am working on as it will take longer to explain than can be covered in a short blog article.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
Since I started investing in GHH in 2004, the company has been transformed from essentially a one product company (Q Switches for industrial lasers) to a diversified entity with a variety of end markets (Defence, Life Sciences, Industrials). It for this reason that such a profit warning now only effects the magnitude of the YoY revenue growth when it would have once lead to a savage YoY decline. It is exactly the sort of company you want to own to ride out the ups and downs of the economy. Hence I bought some of your shares this morning.