I say it’s time to buy as the FTSE 100 crashes, but I’d avoid this stock

For long-term investors, I reckon it’s time to buy shares as the FTSE 100 crashes. But we do still need to be cautious, and here’s one I wouldn’t touch.

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Not only is the coronavirus threatening the health of the country, it’s hammering our wealth too as the FTSE 100 has slumped. But when the FTSE 100 crashes, I say it’s time to buy.

Anyone who follows the Motley Fool surely knows not to panic and sell all your shares. The history of long-term investing suggests that could be a costly move. But what should you buy?

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If you’re uncertain, I think you could do a lot worse than investing in a FTSE 100 tracker right now. And if you really are worried about the next few months in the market, you could spread your money out. Invest a bit this month, a bit next month, and so on.

Anything and everything?

There’s a temptation to just buy any shares that have fallen, and I suspect you’d have something like a 90% chance of making a profit. But there are some that have fallen for rational reasons and not just in response to the virus threat. How do you spot them? Well, one rule of thumb might be to look for shares whose fall just about matches that of the Footsie. Anything bigger than that, and there could be some bad news.

But there’s no real substitute for doing a bit of research and checking the news feed for your candidate stocks over the past few months.

If you don’t, and you just go for fallen stocks, there’s one you could be very tempted by. I’m talking of Capita Group (LSE: CPI).

Since round about the time the seriousness of the coronavirus pandemic was becoming clear, the Capita share price has fallen by 67%. That’s way more than the FTSE’s drop, so what’s behind it?

Just the FTSE 100 crash?

Capita is one of the country’s leading outsourcing specialists, and that’s a sector that could certainly constrict should public projects be reined in. It’s a tough business to be in at the best of times, and Capita has been struggling along with the rest of the sector.

But there’s more than sector weakness behind Capita’s woes. While the rest of the market was closely following the FTSE’s fall, the Capita share price’s downturn accelerated on 5 March. Since that date we’ve seen a 60% crash.

The key event was the release of 2019 full-year results, updating us on the company’s restructuring progress. Capita did say “We have made good progress with the transformation,” and highlighted all the good things. But there was a telling statement right there up near the start, where the firm highlighted “More investment needed than initially thought.”

Not time to buy

That’s the key, as my Motley Fool colleague Roland Head explained. It all stems from the firm’s rescue via a £700m fundraising in May 2018, and things aren’t going as well as had been hoped.

For 2019, Capita recorded a pre-tax loss of £62.6m, and saw net debt soar from £466.1m to £790.6m. If Roland sees that “More investment needed than initially thought” thing as a hint that Capita is going to need to raise further capital, I’m with him.

I see plenty of great bargain buys in the FTSE 100 and FTSE 250 right now, but in my book Capita is not one of them.

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Alan Oscroft 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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