Some clubs are worth joining, others less so. One which is definitely a club to avoid is the ‘90% Club’. This is where a company’s share price falls by 90% or more from its recent high (recent being defined as being within the last five years), thereby entailing huge losses for its shareholders.
Of course, there are surprisingly few stocks which have become members in recent years as a result of the bull market that has taken place. With the FTSE 100 flying high at well above 6,000 points for the last couple of years, few companies have been in such trouble as to see their equity value almost wiped out. However, with the collapse in commodity prices and the sharp decline in investor sentiment, even former FTSE 100 resources plays such as Tullow Oil (LSE: TLW) are getting perilously close to being worth just 10% of their value from just a few years ago.
In fact, Tullow Oil’s share price has fallen from 1566p in the early part of 2012 to just 168p at the present time. That’s a fall of 89.3% and, clearly, just a relatively small move downwards would push it into the 90% Club. The chances of this happening are high, since it is a small amount and also because the outlook for oil is rather weak. Investors expect further instability in oil prices, which could hurt sentiment in Tullow Oil moving forward.
However, with Tullow Oil trading on a price to earnings growth (PEG) ratio of just 0.1, it appears to offer a wide margin of safety and excellent long term value for money. As such, and while things may get worse before they get better, Tullow Oil appears to be an excellent long-term buy for less risk-averse investors.
Similarly, Genel Energy (LSE: GENL) has posted a major fall in its share price since its 2014 high of 1113p. Today it trades at less than 25% of that value, meaning that it still has a rather large cushion before reaching the 90% Club. Still, a worsening in the political situation in Iraq may cause operational difficulties as well as a decline in investor sentiment. Furthermore, a lack of payments from the Kurdistan Regional Government (KRG) may also exert downward pressure on Genel’s share price.
However, as with Tullow Oil, Genel Energy offers a very wide margin of safety, with its shares trading on a PEG ratio of only 0.8. As such, they appear to be worth buying right now and, with the company having an excellent asset base in one of the final frontiers of energy exploration, its long term performance could be extremely strong and push its share price back up to its previous highs.
For investors in Rockhopper Exploration (LSE: RKH), though, membership of the 90% club is already on offer. Its shares were trading as high as 388p in 2012 and dipped to just below 38p in the last week before recovering to their current level of 39p.
While disappointing, Rockhopper Exploration remains a company with considerable future growth potential. For starters, its joint venture in the Falkland Basin has produced excellent results this year and with two of the four wells yet to be drilled, further positive surprises regarding reserves could lie ahead. Furthermore, Rockhopper has sound finances, which should allow it complete its drilling programme and mean that investor sentiment does not worsen significantly as the market becomes nervous regarding the outlook for resources stocks seeking additional capital.
In addition, Rockhopper Exploration now trades on a price to book value (P/B) ratio of just 0.7 which indicates that its shares offer excellent value for money.
