Is this value small-cap stock a falling knife to catch after dropping 15%+ today?

Is now the right time to buy this major faller?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Buying shares in companies that have recently released disappointing news can be a difficult move for investors to make. After all, no share falls significantly without good reason. And in the short run at least, there is danger of further share price declines.

On the flip side, though, the potential rewards from buying out-of-favour stocks can be significant. They are often trading with wide margins of safety included in their price, and investor sentiment can quickly change should announcements become more positive. With that in mind, could this 15%+ share price faller be worth buying right now?

Disappointing update

The company in question is natural resources exploration and development company, Metals Exploration (LSE: MTL). It announced on Tuesday that the Runruno gold mining operation has continued to experience difficulties in the BIOX (bacterial oxidation) circuit ramp-up. The company has reported encouraging results when the BIOX circuit ramped-up strongly to around 50% throughput. However, it has once again passivated with currently limited material being processed through the BIOX circuit.

Initial test work has suggested the presence of algae in the return process water has interfered with the performance of the BIOX bacteria. Engineering solutions have been identified to manage the presence of the algae and are currently being implemented. Clearly, there is no guarantee that the issues experienced will be solved within the near term, and this could lead to further pressure on the company’s share price.

The company also reported that it is in advanced talks with its major shareholders to try to procure mezzanine finance which would be sufficient to repay the $12m bridging loans it currently has, as well as meet working capital requirements.

Given the wide range of stocks with bright futures in the resources sector, Metals Exploration may be a stock to watch, rather than buy, at the present time. It appears to have a highly uncertain future which could lead to a further decline in investor sentiment. Therefore, even though it is now much cheaper than it has been of late, it may be a stock to avoid for the time being.

Difficult trading conditions

Also falling heavily after releasing news on Tuesday was Action Hotels (LSE: AHCG). Its shares fell by as much as 10% after it released results for the first half of the year. They showed growth in revenue of 10%, while gross profit moved 6% higher. The company benefitted from having a 13% increase in operating rooms versus the same period of the prior year. Its occupancy rate at its mature hotels, however, fell by 2% to 72.7%.

Trading conditions remain tough in certain markets in the Middle East, although the company has confirmed that it is on track to meet market expectations for the full year. It has conducted a review of its pipeline and has decided to delay the openings of two of its leasehold hotels in Saudi Arabia. This is designed to efficiently manage its cash and debt position, and only minimally impacts on its 2017 forecasts.

With a sound growth strategy and strong performance in Australia and the Middle East, despite mixed conditions, Action Hotels could recover from its recent share price fall. It remains a relatively risky stock which may have an uncertain future. However, for less risk-averse investors it could be worth a closer look.

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.

Peter Stephens does not own shares in any of the companies mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

2 recession-resistant UK stocks I’d buy and hold for a decade!

Our writer details two UK stocks she believes could still continue to perform well in a recession and not feel…

Read more »

Back view of blue NIO EP9 electric vehicle
Investing Articles

Down 31% this year! Is now the moment to buy NIO stock?

NIO stock has moved sharply downwards in the past couple of months. Christopher Ruane likes the business potential -- but…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 dividend stocks I reckon could grow payouts for years to come!

This Fool is looking for dividend stocks and explains why these two picks could be primed to grow their payouts…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Should I buy, sell, or hold my Rolls-Royce shares at £3.50?

This Fool considers what he should do with his Rolls-Royce shares following the FTSE 100 company's excellent full-year results last…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

With a spare £280, here’s how I’d start buying shares this March

Our writer reflects on what he has learnt on the stock market to explain how he would start buying shares…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Are these expensive FTSE 100 stocks actually brilliant bargains?

Paul Summers takes a closer look at two FTSE 100 stocks that could recover strongly in time, despite already carrying…

Read more »

Investing Articles

What might the recent Aviva share price performance tell me as an investor?

Christopher Ruane looks at how the Aviva share price has performed over the past 12 months and considers whether he…

Read more »

Investing Articles

Down by a quarter, is the BT share price a steal?

The BT share price has more than halved in the past five years. What is holding it down -- and…

Read more »