The FTSE 250‘s home to a lot of interesting stocks, but sadly, not all of them look like good investments. In fact, running down the list, I see that there are quite a few I’m avoiding like the plague. And that includes John Wood Group (LSE:WG.) and Close Brothers Group (LSE:CBG).
Both companies have found themselves in hot water this year. Questions from investors are now circulating regarding both firm’s financial health, as well as uncertainty surrounding looming external threats. With that in mind, it’s no surprise both stocks have seen around two-thirds of their market-caps wiped out. What’s going on?
Financial audits are never a good sign
It doesn’t take more than a quick glance at John Wood’s stock price chart to notice that something’s very wrong. Since the start of 2024, the FTSE 250 stock has collapsed by over 60%, suffering from two double-digit crashes in August and November.
All of this comes after failed multiple takeover bids in the later stages of due diligence and negotiation. Then, in its subsequent results, an impairment charge of $815m and $140m in project exit expenses were announced, along with an independent audit of its financials.
To be fair, an impairment charge doesn’t affect cash flow. And the firm’s consulting division does appear to be performing admirably, delivering better margins. As such, management’s reiterated its full-year guidance. However, with more questions than answers, John Wood Group isn’t a business I’m rushing to add to my portfolio today, even if the valuation looks cheap.
Regulatory probes are bad for business
Close Brothers is another stock that’s taken a massive hit this year, falling by more than 70% since January. In fact, it’s fallen so much that its price-to-earnings ratio sits at just 3.5 today. By itself, an earnings multiple this low suggests a screaming buying opportunity. But after closer inspection, this seems to be nothing more than a value trap, in my opinion.
The company’s found itself at the centre of the ongoing FCA investigation into motor finance loans and undisclosed commissions. The regulatory probe’s still ongoing, but if it finds wrongdoing, Close Brothers could be facing a fine of up to £640m, according to estimates by analysts at RBC Capital Markets. That’s almost six times what the firm made in net profit in its 2024 fiscal year ending in July.
As horrendous as this sounds, it’s important to note that nothing’s guaranteed. Even if Close Brothers is found liable, the fine could be considerably less than currently expected. Given how low the stock price is, that could spark a welcome rally in the short term.
However, just like with John Wood Group, I’m not interested in investing in a business that’s shrouded with uncertainty, especially when regulators are involved.
