There’s no doubt about it, there have been plenty of FTSE 100 casualties this year. Some of the falls in share prices can just be attributed to general market volatility, which seems to have been lurking about since the summer.
However, with some share prices under pressure, investors can identify the cause with a degree of ease, and in the case of blue-chip laggards Rolls-Royce (LSE: RR), Glencore (LSE: GLEN) and Anglo American (LSE: AAL), the problems facing either the business or the sector have been well publicised.
A quick glimpse at the chart tells a painful story, with share prices between 50% and 73% below their 52-week highs.
However, the contrarian in me is always on the lookout for an out-of-favour bargain stock – but is there a bargain to be had here? Let’s take a look…
Digging deep
Mining stocks in general seemed to turn a corner in October with a broad sector recovery, as some fears about a general global slowdown abated, prompting investors to return back to the sector in droves.
The share price recovery, however, seems to have been short-lived, with prices again trending downwards. There was no good news to calm investor concerns on Tuesday, with the disappointing news that Japan had fallen back into recession.
Indeed, it is rather difficult to predict which way the price of commodities will go in the short term or whether there is to be a recovery in the sector as a whole. What does have me interested, however, is the price to tangible book value (PTBV), which is around 0.5 for both Glencore and Anglo American.
Theoretically, PTBV represents the hard assets of the company, i.e. the amount of money that shareholders would receive for each share owned if the company were to liquidate its operations. Some ‘intangible’ assets can have questionable value — for example, a company might have overpaid for an acquisition. Accordingly, conservative value investors sometimes prefer to remove them when valuing a company. So here investors are paying around 50p for every £1 of assets! This makes both companies look very cheap; however, it must be remembered that assets are only worth what buyers are prepared to pay… but it is certainly worthy of some further research, in my view.
The sky’s the limit
It seemed that investors were ill prepared for Warren East’s strategic update, the first two paragraphs of which are below. For me, it is the first paragraph that worried investors the most:
“While 2015 remains broadly as expected, the outlook for 2016 is very challenging. The speed and magnitude of change in some of our markets, which have historically performed well, has been significant and shows how sensitive parts of our business are to market conditions in the short-term.
“At the same time I remain very confident about the opportunities before us and convinced that our long-term outlook is positive. Our industrial transformation is proceeding well and our core large engine business remains on track to gain significant market share and build a strong, cash generative platform for the future.”
Rather unsurprisingly, the shares bombed to prices not seen since 2010, though they have since recovered from their apparent nadir as bargain hunters swept in to pick up some shares in what is perceived by investors to be a quality operator.
To me, those bargain hunters need to be fairly confident that the outlook is baked into the share price, and with a “very challenging” landscape ahead, I wouldn’t be surprised to see another profit warning in the New Year.
That said, here we have a market leader sporting a new CEO with an excellent track record at ARM Holdings looking to reshape the business into a more aerodynamic and profitable organisation that will be fit enough for the future challenges that are ahead.
Which view to take?
Here we have three blue chips, which on the face of it are trading at either new lows or lows not seen for some years.
They are, however, at these lows for a reason. Accordingly, prospective investors should ensure that they do plenty of research before taking a position against the stock market professionals who may be of an opposing view.
