3 Falling Knives I’ve Put On My Radar

Executive bonuses limited to just £1,000 suggests all is not lost in one of these companies.

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I hope you are coping with the awful weather and you have my sympathies if you have more than just shares ‘under water’ right now…

Everybody has been enjoying massive multi-baggers

Now if you’re a regular reader of my articles, you could be excused for thinking shares only ever go up while everybody and his broker has been enjoying massive multi-baggers.

If only.

In reality, quite a few shares have suffered large knocks during recent weeks, which is bad news for those people holding… but perhaps good news for those of us looking for bargains in what still remains a bull market.

The contrarian in me is always tempted by a ‘falling knife’ – here are three names that have caught my eye.

I’d want to see the shares fall lower before committing my hard-earned

The shares of Rolls-Royce (LSE: RR) dived 13% one day last week when the engine manufacturer admitted sales and profit growth would “pause” during 2014.

Rolls blamed “well-publicised cuts in defence spending” for treading water this year, which seems quite a fair explanation to me.

Clearly investors weren’t expecting the setback, especially given Rolls had sailed through the banking crash and recession. Between 2007 and 2013, the blue chip had raised sales by 98%, underlying pre-tax profits by 108% and the dividend by 69%.

As well as that resilient performance, other factors suggesting this £19bn business should soon rediscover its momentum include a very prominent competitive position, regular income in the form of substantial servicing and maintenance revenues, as well as almost £2bn of net cash.

(Rolls is actually one of the few FTSE 100 firms blessed with net cash!)

This is a quality operator, but I’d want to see the shares fall lower before committing my hard-earned – perhaps 800p and a P/E of 12 would make the share very tempting.

A Harvard professor’s blog that cited “deceptive tactics”

From aero jet engines to video search engines, and Blinkx (LSE: BLNX), which has come under scrutiny from a Harvard professor’s blog that cited the group’s acquisitions were using “deceptive tactics”.

The shares sank 40% on the details, although the market cap still remains sizeable at close to £500m.

Certainly Blinkx’s track record has attracted many growth fans. Revenues surged from $6m to almost $200m between 2008 and 2012 while the latest interim results showed profits almost doubling.

Nevertheless, the Harvard blogger did mention acquisitions and the firm has spent a thumping $100m on purchases during the last few years. With annual profits at about $32m, such huge expenditure could signal over-ambition, over-spending or over-looking integration problems.

I also note there is no executive finance director on the board.

I doubt Blinkx will go bust soon with net cash of $69m, but the P/E is still a racy 30. So there’s seems plenty of time to wait on the sidelines to see whether the professor is right (or not).

Executive bonuses limited to just £1,000 suggests all is not lost here

Finally there’s Games Workshop (LSE: GRP), a £160m developer of role-playing games and one of the most idiosyncratic businesses on the market today.

Indeed, the chairman has replaced the progressive dividend policy with a ‘pay-what-we-can’ approach and likes to keep shareholder updates to a minimum.

Certainly the market was stunned last month when it saw interim profits down 30% – there was no earlier warning and the shares submerged 25%.

This business is apparently the predominant player in the war-gaming sector, although the track record does not suggest a genuine ‘franchise’. Profits of £21m in 2013 compare with £20m achieved back in 2004, with the years in between witnessing various problems followed by a strong recovery.

Still, that strong recovery, £10m net cash and executive bonuses limited to just £1,000 suggests all is not lost here. I should add the boss currently boasts a £10m stake and spent £1m two years ago buying shares at 535p (the price is now 514p).

(His previous purchases occurred in 2008 at an average of just 188p…)

I’ll be ready to pounce, but only when the price is right!

As you’ve probably deduced, I am in no rush to catch any of these falling knives right now.

None of the valuations seem ultra-compelling, and my experience tells me there could be more fingers sliced as further bad news is drip-fed to the market.

Nevertheless, all three have the net cash to survive their current issues, and either a leading competitive position, mega industry growth or past turnaround experience to justify a place on my radar.

After all, successful investing is all about doing your homework on worthy companies in advance… and being ready to pounce only when the price is right!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Maynard does not own any share mentioned in this article.

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