When Shares Come Back From the Dead

THE WEEK: Is there anything more gratifying than being rewarded for playing the long game, asks Morningstar columnist Rodney Hobson? 

Rodney Hobson 28 June, 2019 | 10:15AM

carpet

Few experiences in stockmarket investing offer more pleasure and hope than seeing bombed out shares come back from the dead. While there is no excuse for the twin sins of indolence and refusal to admit mistakes that lead investors into clinging on while shares are falling, it does provide gratification for those who, like me, believe that investing is for the long term.

Playing the Long Game

Take Carpetright (CPR), for instance. Four years ago the shares hit a peak of 600p; now they are around 16p, having lost an amazing 97% of their value. Few companies fall so far from grace and survive but the floorcoverings retailer is still with us – only just, though, as it nearly went bust last year before a rescue restructuring that involved shutting underperforming stores and raising £65 million.

The first sign of revival came with an encouraging trading update in April, and although pre-tax losses in the year to 27 April were a clunky £24.8 million, that was miles better than the £69.8 million loss in the previous 12 months. Like-for-like sakes in the core domestic market are 8.5% ahead in the first weeks of the current financial period after years of decline.

The shares are not for the fainthearted – that includes me – but for those who seek out penny stocks with the potential to bounce back they are at long last worth a look.

Wood Group’s (WG.) fall from grace has been less dramatic but the shares have still lost more than half their value, from just shy of 900p in January 2017 to around 440p. They have actually picked up a little of late, having looked like crashing below 400p earlier this month.

In the past, the Aberdeen-based seals and valves maker, has been heavily reliant on customers in oil and mining, two sectors at the mercy of wildly fluctuating prices. In particular, coal mining has gone out of fashion confronted by the march of the environmentalists.

Its newer target markets are chemicals, infrastructure, nuclear and renewables, plus shale gas in the US. This seems to be bearing fruit, as first half underlying operating profits are expected to be up 25% on the same period last year even though revenue is little changed.

There has been some concern over the dividend, which has been covered by underlying earnings but not by earnings after allowing for exceptionals. However, the payout edged higher in 2018 and will surely do so again this year, giving a prospective yield of about 5%.m Results are published in US dollars and the dividend is paid in cents. Conversion into sterling will be favourable if the current declining value of the pound persists.

While the best chance to buy came at the end of last month, it is not too late to take a punt.

Serco is Surviving

Nothing, it seems, will convince governments of any hue to consider whether outsourcing is lousy value for taxpayers, despite attempts by the beneficiaries of this largesse to demonstrate how untrustworthy they are.

So I always felt that one day Serco (SRP) would come in from the cold – and that day may be here at long last. It shares lost four fifths of their value from 370p five years ago to under 80p in early 2016 but they started to recover at the end of last year to top 140p.

A similar earlier recovery petered out around this point but this time could be different. A first half trading update shows underlying operating profit up 20%. This will be the third consecutive year in which the order intake (including the largest contract won to date) will exceed revenue, which itself will come in at the top end of the forecast range.

Don’t expect a dividend this year. It is just possible to hope for a very modest payout next year.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Carpetright PLC14.30 GBX2.14
Serco Group PLC141.90 GBX0.78
Wood Group (John) PLC433.00 GBX0.14

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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