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Saga’s share price has tanked. Is this a buying opportunity?

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Shares in over-50s insurance and holiday company Saga (LSE: SAGA) have underperformed recently. When I last covered the stock in June, the share price was near 450p. Today however, it’s at 275p.

So why has Saga’s share price tanked over the last few months? And has the fall created a buying opportunity for me?

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Why Saga’s share price has fallen

In my view, there are a few reasons Saga’s share price has fallen. One is concerns over Covid-19. Recently, we’ve seen a spike in cases across Europe and, as a result, a number of countries have reintroduced lockdown measures.

This has impacted sentiment towards travel stocks. Just look at the share prices of Carnival, easyJet, and IAG – all have taken a hit recently.

Another issue is that the group’s H1 results for the six months to 31 July, posted in September, were a little underwhelming in some areas. On the retail broking side of the business, for example, the group only delivered 0.5% growth in motor and home policies sold. Perhaps investors were looking for a higher level of growth here. It’s worth noting that last year’s full-year results showed growth of 1.1% in this segment.

A third issue is broker price target cuts. Last month, analysts at Credit Suisse cut their Saga share price target to 423p from 471p. This kind of negative broker activity can impact a company’s share price.

Finally, it seems the market did not like the terms of a recent bond deal. Back in late June, Saga said it would be issuing a £250m fixed-rate bond at an interest rate of 5.5%. After the details of the bond deal were announced, the share price fell significantly.

Should I buy Saga shares today?

Looking at Saga shares today, they do look interesting from a value investing point of view, in my opinion.

At present, the consensus earnings per share forecast for next year (ending 31 January 2023) is 60.7p. That means at the current share price of 275p, the forward-looking P/E ratio is just 4.5. That seems very low. If business performance picks up, that valuation could turn out to be a bargain.

One person who clearly sees value here is chairman Sir Roger De Haan. Regulatory filings show that on 16 November, De Haan purchased 341,415 Saga shares at a price of 293p per share. This trade cost the insider just over £1m. I see this director dealing activity as quite bullish. It suggests the chairman is confident about the future and that he expects the share price to rise from here. 

However, one issue I personally have is profitability. I like to invest in companies that are highly profitable. Diageo and Microsoft are examples of very profitable companies. These kinds of companies can reinvest their profits and generate further growth, taking advantage of the power of compounding.

Traditionally, Saga has not been very profitable. Even before Covid-19, its return on capital employed was very low.

Given the weak earnings level here, I’m going to keep Saga shares on my watchlist for now. I think there are better opportunities in the stock market for me today.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns shares of Diageo and Microsoft. The Motley Fool UK has recommended Diageo and Microsoft. 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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