The old stock market adage is that when a company issues a profit warning, there are likely to be two more coming along the track in the weeks and months.
"Profit warnings come in threes," is a cautionary tale for investors that seems to have been around since the year dot.
But a study of profit warnings from UK small-cap companies finds that it is not generally true.
In fact, the analysis of 245 profit warnings from UK small caps conducted by Stockopedia found roughly 64% of the companies only issued a single profit warning, while 36% experienced multiple warnings and just 11% of the companies warned on profits three or four times.
There was another pattern that did emerge: a significant underperformance leading up to profit warnings.
According to the findings of the research, stocks tended to decline by an average of 6% in the six months leading up to a profit warning.
On the actual day of a profit warning, the shares crash pretty much every time, with an average fall of 21% on the day and a 19% fall across the database.
Fast-forward 18 months after the initial profit warning, share prices still had not recovered across the 245 stocks, with a six-month oscillation but a continued drawdown.
"The lesson here is simple: Sell on a profit warning - the opportunity cost is high," said Stockopedia founder Ed Page Croft.
The possibility of trading the "bounce" on the day of a profit warning was also explored.
This found that stocks with the largest intraday drawdowns tended to experience the most significant rebounds.
However, Croft cautioned that attempting to profit from a 30% fall required bravery and was "only for the brave".
Based on this data, the need for caution when dealing with small-cap stocks facing profit warnings is reinforced; failing to act promptly can lead to substantial financial losses.
But quality counts, as only the highest quality stocks (as determined by Stockopedia's ranking system that assesses profitability, cashflow, margins, risks and fundamental trends) exhibited a predictable chance of recovering after a profit warning.
For the rest of the stocks, the advice is clear: "sell."