Buying shares with free money sounds like a pretty attractive proposal, especially given that many stocks in the FTSE 250 are trading on low valuations. That said, investors still need to be picky.
Share price crash
It sounds a bit odd to say I’m wary of luxury car firm Aston Martin Lagonda (LSE: AML). After all, the share price is up over 50% from November last year.
Sure, that sort of gain — like one of its vehicles — would have been nice to have. However, there’s a twist in the tale. Tellingly, the very same stock has actually halved from the 52-week high it set at the end of July. It’s also down a staggering 95% since listing.
Look beneath the bonnet and these crashes in value make some sense. Yes, revenue is going in the right direction and average sale prices are rising. However, 110-year-old, debt-laden Aston Martin remains loss-making and now expects to sell only 6,700 vehicles this year, due to production issues relating to its new DB12 sports car. That’s 4% lower than previously predicted.
Offer me a free car and I’ll bite. Give me money to buy a stake and I’ll flatly refuse.
Out of fashion?
Another stock that was clearly priced far too high when striding onto the market is fashion footwear brand Dr Martens (LSE: DOCS). Its value has tumbled more than 70% since listing in 2021.
Again, I don’t think this has much to do with the product. As it happens, I own a pair of the company’s famous boots.
However, I do wonder whether a market-cap still above £1bn can really be justified for a business whose product can fall in and out of demand. However, it’s a hugely popular brand so I could be wrong.
But we know supply and operational issues have been impacting margins and trading in the Americas has been tough going. Interestingly, the company said in July that the actions it had taken to address the latter “will take until the second half to see a meaningful improvement“.
We’re now in that second half and Dr Martens is due to update the market on performance at the end of November.
Considering that the cost-of-living crisis is still with us, I wonder if a worse-than-expected outlook could mean another drop lies ahead.
Pub chain JD Wetherspoon (LSE: JDW) completes my trio of mid-cap stocks I wouldn’t consider buying. That’s despite its valuation moving 40% higher in the last 12 months.
Now, I certainly wouldn’t have predicted such a gain based on the aforementioned monetary pressures we’ve all been dealing with. However, JD reported a pre-tax profit of £42.6m for FY23 in October. That’s a far better result than the £30.4m loss of FY22. A 9.9% rise in like-for-like sales in the first nine weeks of its new financial year also bodes well.
On the flip side, analysts have expressed concerns about the long-term decline in margins. That’s rather worrying, considering this was never a high-margin sector to begin with. It also makes a price-to-earnings (P/E) ratio of 17 looks rather steep to me.
So while recent business has been encouraging, I think there are many vastly superior investment opportunities with better growth prospects out there at this time of market malaise.