When FTSE 100 shares crash, I’m in like Flynn. I want to work out why they fell, whether the sell-off was justified, and how fast they can recover (assuming they do).
A crash can be a fabulous opportunity to pick up a good company at a cut-price valuation, and with a higher yield to boot. As a long-term investor, I’m happy to give them the time they need to turn things around.
As with any investment strategy, there are risks and rewards. I’ve had a very different experiece with two recent turnaround stocks, spirits giant Diageo (LSE: DGE) and sportswear retailer JD Sports Fashion (LSE: JD).
Turnaround stocks
I dived into Diageo on 24 November, a couple of weeks after a profit warning knocked 20% off its share price. Sales slumped in Latin America and the Caribbean, and the board hadn’t seen it coming. Nor had investors, who weren’t happy.
I’d been wanting to buy Diageo for years, but decided it was too pricey. I saw my chance and took it. As I feared, there was more bad news to come. In January, Diageo confirmed the scale of the damage, with first-half profits down 11%. Its tentative recovery faded, and the stock continues to struggle. As of today, I’m down 8.38%.
That doesn’t worry me too much, I’m in this for the long-term, as I said. In fact, with the Diageo share price 25.96% lower than it was 12 months ago, I’m tempted to buy more. It looks really good value today, trading at 15.84 times earnings. For years, it traded at around 24 times. The yield has crept up to 3.09%.
My underlying worry is that I keep reading how Gen Z is drinking less than older people and wonder if we could see a generational shift from booze. I think today’s low valuation helps mitigate some of that risk. Averaging down on Diageo shares will also cut my paper losses too.
Another bargain equity
My other recent recovery play, JD Sports, has been more successful. Again, I bought it a couple of weeks after it issued a profit warning, adding it to my portfolio on 22 January.
JD’s slump followed a poor Christmas trading period but in contrast to Diageo, the news has got slightly better. In March, the board reaffirmed full-year profits guidance of between £915m and £935m, despite “challenging” trading.
This was another stock I’d been watching for years, waiting for a more amenable entry point. A valuation of just nine times earnings seemed unmissable to me. So far, I’m up 12.5%, which is comforting although these are early days.
I hope sales will recover when interest rates are finally cut, sentiment lifts and consumers have more money in their pockets. Again, I have one long-term worry. JD Sports sells huge global brands such as Adidas and Nike. If they take their business elsewhere, the firm could struggle to recover. Hopefully, it won’t come to that.
So that’s my strategy. I’ve got one early loser, and one early winner. Over time though, I hope both will prove that I was right to buy them, and chose the right time.
