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Why Shares Of Glencore PLC, Coca Cola HBC AG & Tullow Oil plc Have Collapsed

Some of the best returns you can earn in the stock market come from going against the crowd and buying shares that have fallen heavily. But it’s no good being a contrarian just for the sake of it. You need to understand why the share price has collapsed, and whether the company offers the potential for an enhanced future return.

Glencore (LSE: GLEN), Coca-Cola HBC (LSE: CCH) and Tullow Oil (LSE: TLW) are three FTSE 100 blue chips whose shares are hitting 52-week lows today. At the time of writing, Glencore’s new low is 238p (down 37% from its high last year), Coca Cola HBC’s is 1,052p (down 41%), and Tullow Oil’s is 347p (down 62%).

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Valuing Glencore has always been problematic. Unlike the Footsie’s other industry giants, Rio Tinto and BHP Billiton, Glencore is not just a miner, but also a commodities trader.

At the time of its 2011 stock market listing, Glencore touted its hybrid business model as a driver for creating superior shareholder value, but its shares have since under-performed those of its humble hole-digging peers.

Glencore should merit a premium to its vanilla rivals — and, indeed, continues to trade at a hefty one — but exactly how much of a premium it deserves is a moot point. Indeed, there’s much about Glencore on which opinions differ. For example, the company’s mega-acquisition of Xstrata a couple of years ago was a “savvy” move on one view, or “horribly timed” on another. Similarly, while Glencore’s trading division thrives on volatility, analysts at Deutsche point out “it needs to be the ‘right sort of volatility'”.

When metals prices took a big hit after the World Bank slashed global growth forecasts this week, Merrill Lynch analysts calculated that at the prevailing levels the consensus forecast for Glencore’s bottom-line earnings would be completely wiped out.

Frankly, the complexity and dynamics of Glencore’s business are beyond me, and I have no idea whether the company represents a contrarian investment opportunity at the current price.

Coca-Cola HBC

Coca-Cola HBC — the HBC stands for Hellenic Bottling Company — is one of the world’s largest bottlers for the products of The Coca-Cola Company. Coca-Cola HBC operates in 28 countries: Ireland, Austria, Switzerland, Italy and Greece, the expanse of countries in central and eastern Europe, Russia and Nigeria.

Coca-Cola HBC’s shares have been hit by something of a macro perfect storm: political unrest in Russia and Ukraine, an oil price collapse impacting the economies and currencies of Russia and Nigeria, and a continuing moribund Eurozone. All of these, of course, are outside the company’s control, and, despite them, analysts still see annual earnings growth of 10% for this year and next.

Operating margins are currently mid-single digits, but in more benign times could get back to 10% or even up towards the mid-teens that are achieved in less-challenged geographies by other bottlers Coca-Cola FEMSA, Coca-Cola Amatil and Embotelladora Andina. As such, I think Coca-Cola HBC presents a decent contrarian opportunity after the steep decline of the shares. 

Tullow Oil

Sentiment towards oil explorer and producer Tullow has, of course, been directly and severely hit by recent the collapse of the oil price — although it has to be said that the company’s shares had already been in decline for a couple of years on the back of largely uninspiring drilling newsflow.

In November, Tullow announced a shift in its strategy, saying it would be slashing its exploration spend and focusing on its on producing and development assets. In a trading update today, the company announced a further cut in exploration expenditure, and hefty non-cash exploration and appraisal write-offs and impairment charges.

Chief executive Aidan Heavey said: “While this is a challenging time for our sector, Tullow is fortunate to benefit from world-class, low cost and high margin assets, strong and growing cash flows and a broad, diversified funding position”.

There’s an easy-to-understand long-term production/cashflow growth story at Tullow, and the current oil crash could represent a good contrarian opportunity for far-sighted investors.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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