It was another treacherous day for XRO falling a further 6%, an overall fall of 64% from its Mar 14 highs. Given its astonishing fall from grace, one must question the drivers behind such a move.There are several important factors to the recent share price correction that should be bought to attention.
Firstly, a significant driver of the rally higher in Mar 14 was caused by XRO's inclusion in the FTSE’s Asia Pacific global equity index. This saw the share price pop higher before selling off almost non stop to its current levels. The price action indicates a positioning clear out of speculative shorts and fund managers that were underweight on XRO stopping into a long position before its inclusion.Fund managers who follow the index would need to buy the stock post 24th Mar 14, putting upward pressure on the price. However, the sharp move higher with no follow up buying indicated a negative outlook for the price action and suggested stretched valuations given the stocks current outlook.
Secondly, XRO's investor update disappointed the market,showing that it had only gained 4,000 US customers in the six months to September, versus 8,000 in the prior half-year. Furthermore, analysts at
Woodward Partners criticized the company, calling for it reconsider its US strategy and instead focus on its more established markets (NZ, AU, UK). This would be a momentous change in direction for the company given that the majority of its current value is reliant upon its successful penetration into the US market.The negative press and disappointing results has further added to the market selling pressures.
In Oct last year, XRO completed $NZ180mio capital raising, issuing 9.92 million shares at $NZ18.15 apiece.
Trading restrictions which prevented investors in the capital raising from selling their shares ended on Oct 16 and there has been market speculation that newly freed-up stock could be sold, which would drive the share price down further.
Also playing on investors' minds has been the circa 10% selloff in the NASDAQ driven by global macro events such as the rise of Isis forces in Iraq and Syria, the ongoing saga between the West and Russia over the Ukraine, the sharply rising death toll from the Ebola virus in Africa and the ongoing protests in HK. In addition to the above political tensions the IMF has downgraded its global growth forecasts and US data continues to disappoint, bringing into question the strength of the US recovery. These obstacles have lead to a materially impact on investor confidence.
Combined, the above points go some way to explaining the negative price action investors have experienced of late. However, any prudent investor should bear in mind that while minor setbacks may affect shares prices over the short run, but ultimately fundamentals dictate. XRO continues to be the most innovative and best in class. Despite analysts downgrading XRO's growth forecasts, management are true believers in the strategy and in my opinion it is too early to accurately call their US venture 'disappointing'. We must bear in mind that XRO is a start up and as such, growth is likely to be patchy, but taken over the longer term a clearer pattern will be evident. They have proven track record in both NZ and AUS and have made significant in roads into the UK market. By these markets alone XRO is a 2bn plus company and therefore is looking like value at current levels.
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