Three of the biggest fallers in the FTSE 350 this year have been Rolls-Royce Holding (LSE: RR), Imagination Technologies Group (LSE: IMG) and Petra Diamonds (LSE: PDL).
As an investor, it’s tempting to think that these formerly successful businesses are now cheap turnaround buys.
In this article I’ll take a look at each company and ask whether now is the time to buy — or whether these shares remain falling knives that are likely to slash your wealth!
Rolls-Royce
Star fund manager Neil Woodford has a record of making good calls on major stocks. Mr Woodford’s blog post last week made it very clear that he’d lost faith in the ability of the firm’s management to deliver reliable profits.
One particular problem is the strange way the group sells its aero engines, taking an initial loss on the sale of the engine and making a profit on aftersales service deals. While investors were happy to accept this opaque accounting when times were good, concerns are rising as profit margins from new engines are expected to be lower over coming years.
Rolls’ new chief executive, Warren East, has said that the group will not issue medium-term earnings guidance for the next year or so, as the outlook is too uncertain. This suggests to me that current broker forecasts may be worth very little.
In my view it’s too soon to buy back into Rolls-Royce. Watching patiently from the sidelines may be the best way to avoid further losses.
Imagination Technologies
Once seen as a strong rival to ARM Holdings, Imagination is now more of a distant relative. ARM shares have risen by 74% since 2012, while those of Imagination have fallen by 72%.
Imagination shares fell by another 6% this morning, after the firm’s interim results showed a first-half operating loss of £20.8m. That’s double the £10.3m loss reported for the same period last year.
Total revenue was down by 13% to £71.1m, from £82.2m during the first half of last year.
Imagination spends heavily on research and development, and says that this spending will now be cut. That could help turnaround the business in the short term, but risks the firm falling behind its competitors for future products. I don’t see any reason to buy this stock at the moment.
Petra Diamonds
It’s been a poor year for the diamond market. Both prices and demand have fallen further than expected. Petra’s shares have followed suit, losing 66% of their value.
However, analysts following the firm are becoming increasingly bullish. They expect to see a sharp recovery in the 2016/17 financial year. The latest forecasts suggest that Petra’s adjusted earnings per share will rise from 8.9 cents for the current year to 21 cents per share next year.
This puts Petra on a 2015/16 forecast P/E of 11, falling to a P/E of just 5 in 2016/17. There’s also an attractive forecast dividend yield of 3.1% for the current year and 5% for next year.
The reason for this expected growth is that production from new mine expansions is expected late next year. The good news is that thanks to a $300m debt issue last year, the firm’s balance sheet remains relatively healthy, with net gearing of around 30%.
Petra could be a profitable buy at today’s prices, assuming diamond demand doesn’t fall further.
