An uncertain economic outlook has upended these firms' share prices
Questor is The Telegraph's stockpicking column, helping you decode the markets and offering insights on where to invest.
Accurately forecasting a company's financial performance is never easy, but it is proving to be particularly difficult at the moment.
This is largely due to an uncertain near-term economic outlook that has resulted in highly changeable operating conditions for a wide range of firms. Indeed, the timing of interest rate cuts is proving extremely unpredictable given inflation's recent upward trend and the economy's anaemic growth rate.
Investors must therefore accept that the share prices of companies from a variety of sectors, particularly those which are reliant on UK consumers, are likely to be more volatile than would normally be the case as stock market participants react to earnings surprises.
While this may dissuade some investors from buying shares, in Questor's view, it is unlikely to be of great significance to long-term investors. After all, elevated share price volatility does not equate to a greater risk of permanent capital loss.
Of course, a negative earnings surprise still represents a mild disappointment for any investor. For example, Sanderson Design, which is a holding in our Aim portfolio, recently released a full-year trading update that showed its financial performance is set to fall behind the firm's previous expectations.
The interior design company stated just over a year ago that it expected profits for the 12 months to January 2025 to be relatively unchanged versus the prior year. However, its forecasts have gradually come under pressure over recent months.
Indeed, in its latest trading update for the 2025 financial year, which was released in January, the firm stated that it now anticipates pre-tax profits will fall from £12.2m in 2024 to £4m-£4.8m in 2025. This decline has largely been caused by a weak consumer environment in its key UK market.
The company's deteriorating financial prospects have prompted a slump in its share price of around 55pc over the past year. Over the same period, the FTSE Aim All-Share index has declined by 26pc.
Clearly, Sanderson Design could continue to experience challenging operating conditions. Rising inflation and an ongoing restrictive monetary policy may cause a further cost-of-living squeeze that reduces demand for its products.
However, with the firm expecting to have a net cash position of around £5m at the end of its 2025 financial year, it appears to have a relatively sound balance sheet through which to ride out a tough trading environment.
Moreover, its forward price-to-earnings ratio of around 10 suggests its shares offer a margin of safety and that investors have priced in the prospect of further challenges.
Therefore, the stock will remain in our Aim portfolio.
Although it is at the riskier end of the investment spectrum, it nevertheless continues to offer long-term growth potential due to the likelihood of improved operating conditions as inflation ultimately falls and interest rate cuts continue.
Questor says: hold
Ticker: SDG
Share price at close: 48p
Update: Inspecs
Another of our Aim portfolio holdings, Inspecs, has also struggled to meet its previous financial guidance.
The designer and manufacturer of eyewear released a full-year trading update in January, which stated that revenue for the 12-month period is now expected to be just over £200m. This is down on the firm's original expectations and represents a 1.4pc decline versus the prior year.
Encouragingly, the company was able to grow its gross profit margin by 50 basis points to 51.4pc during the year. It is aiming to deliver a further improvement in profit margins during the current financial year, with its performance in the US relatively strong of late.
The firm also continues to use only a modest amount of leverage, with its net gearing ratio amounting to around 35pc at the time of its half-year results.
With its shares currently trading on a price-to-book ratio of around 0.5, it appears to offer a margin of safety after declining by 80pc since being added to our Aim portfolio in July 2022. This compares with a 22pc fall for the FTSE Aim All-Share index over the same period.
Clearly, shares in Inspecs could come under further pressure if its financial performance fails to improve. While it remains a relatively high-risk opportunity, its low valuation means that it retains its place in our portfolio.
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