2 famous growth stocks that may not be around much longer

Roland Head explains why shareholders in these firms could end up losing everything.

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Sometimes you have to cut your losses and sell. And for shareholders in the two companies I’m looking at today, I think that time could be close.

Platinum miner Lonmin (LSE: LMI) has been forced to raise fresh cash from shareholders three times in the last eight years. While most big miners have returned to profitability over the last two years, Lonmin has not been able to do this.

Why are things so bad?

In August, it announced an operational review to try and address the problems caused by the “adverse macroeconomic conditions” and “inflationary cost pressures” facing platinum miners in South Africa.

It plans big cuts to future spending and hopes to be able to sell or share some of its assets to improve cash generation.

But the harsh reality is that not all South African platinum miners are losing money. Rival Anglo American Platinum managed an operating profit of around $50m on sales of $2bn during the first half of 2016. Lonmin generated an operating loss of $181m on revenue of $486m during the period.

A particular problem is that many of the group’s mine shafts are old, deep and expensive to operate.

Likely to be a value trap

We don’t yet know much about last year’s trading, as the firm’s full-year results — which were scheduled for 13 November — have been delayed. That’s worrying in itself, as was the firm’s decision to secure a pre-emptive waiver on some of its banking covenants earlier this year.

I think investors should be cautious until we know more. With the stock trading at an 80% discount to its book value of around 325p, the market is pricing-in further problems.

Lonmin may make it back to profitability, but I think it could end up being broken up and sold piecemeal, with very little value returned to shareholders.

The next big retailer to fall?

When Mothercare (LSE: MTC)  published its half-year results on 23 November, the retailer’s share price fell by nearly 20% in one day. The shares are now worth 43% less than they were six months ago.

Unfortunately, this turnaround story appears to be faltering. Mothercare’s underlying operating margin fell from 2.2% to just 0.3% during the six months to 7 October. As a result, the group slipped to an adjusted pre-tax loss of £0.7m for the half year, compared to a profit of £5.9m for the same period last year.

Restructuring costs and other one-off costs are also draining cash from the firm. Net debt has risen from £15.6m to £37.6m over the last year.

The group says that there has been a “softening in the UK market” in recent weeks, while “weak trading in the Middle East” is dragging down its overseas business. Analysts have cut their forecasts and now expect the group to report a profit of just £13m for the current year.

That puts the stock on a forecast P/E of 13, with profits expected to rise next year.

My concern is that in the UK at least, many of Mothercare’s type of products are either sold cheaply by supermarkets or face intense price competition online. This firm used to fill a clear niche in the market. I don’t see this anymore. I think there’s a real risk this retailer could end up going under.

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.

Roland Head has no position in any of the shares 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.

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