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Four profit warnings in a year do not make for good reading for investors in Staffline Group (LSE:STAF), the recruitment specialist.

The company is already under intense scrutiny as auditor Grant Thornton has said it needs to revisit some of its asset valuations. This is never going to make investors feel good.

For the short trader, the big question is whether Staffline shares have further to fall.

The board of Staffline are already preparing investors for bad news. Full year adjusted operating profit for the period ending 31 December is being cited as likely to be ‘materially below’ previous guidance. Staffline shares have bombed in 2019 and lost 95% of their value, so it could be argued that there is not much left to give the short trader. Profit forecasts were slashed back in May and like many other companies, Brexit was blamed as companies slammed on their recruiting brakes.

The Staffline dividend was scrapped in June, prompting further selling of the shares. Staffline is also being fined for not paying minimum wage during the period 2013-18, which is starting to look very hefty, at GBP 15 million.

Staffline: a good relationship with its banks

Staffline says it has a good relationship with its banks and is not anticipating any covenant issues. What is going to be interesting are the strategic options the company’s board says it is mulling over, which it says will help to materially reduce the size of its debt.

Staffline does not fit the profile of our ideal short trade, largely because most of the damage to the share price was done in literally one day, namely 17 May 2019 when Staffline stock dropped from 782.13 to 308.93. The market was largely caught on the hop and the share price more than halved overnight. Prospects for recruiting were not looking bright in 2019, and while we can accept Brexit is a headwind everybody in the recruitment sector has had to struggle with, Staffline seems to have been spectacularly mismanaged as well.

What we have seen since then are a series of progressive additional declines in value, taking the stock further down to the current price of 46.6.

Do Staffline shares have further to drop?

Recent price action has suggested that there may still be further to go, however. UK recruitment is not out of the woods yet and there are a number of macroeconomic factors, including the still not distant possibility that Brexit will further hammer the UK economy, that could ensure Staffline will have further bad news in store for investors in 2020.

What we can see, however, is a regular decline in price on a day to day basis as more investors lose faith and dump their stock. This means that on most days Staffline continues to close slightly lower than it opened. Recruitment is just not a sector investors want to be in right now, and it still faces too much uncertainty. Among listed recruiters, Staffline has the added concern that it specialises in some areas of the economy that could be hit the hardest by Brexit, including supply chain, HGV drivers and, to cap it all, the automotive business. And we don’t like the way its reports keep mentioning its debt burden, even in a benign way.

For added irony, a company that has been formally censured for its minimum wage practices has a modern slavery and trafficking statement on its website.

Short traders could see some fairly consistent profits from the stock until the management team work out what they are going to do next, but we’d not grade this one a Short of the Week.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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