Contrarian value investing is all about finding unpopular stocks trading at cheap prices. This can be a risky business but the returns on offer more than make up for the risk taken by investors.
Mothercare (LSE: MTC) is one such out-of-favour stock that’s been sold down by investors this year after publishing yet another set of dismal trading figures.
Year-to-date the company’s shares have lost around 50% of their value, taking declines over the past 11 months to around 60%, the kind of fall that would scare off even the most experienced investors.
Still, these declines have left Mothercare’s shares trading at a forward P/E of 10.7 for the year ending 31 March 2017. If the company meets consensus growth forecasts, then earnings per share are set to grow by another 28% in the year to the end of March 2018, implying that the group is trading at a 2018 earnings multiple of 7.4.
Nonetheless, Mothercare’s success is dependent on the company’s ability to return to growth overseas. UK sales are still growing, and this part of the business should support the rest of the group while it pulls through these turbulent times. UK sales rose 2.1% during the first quarter, marking Mothercare’s eighth consecutive quarter of like-for-like UK sales growth. And online UK sales grew by 5.6% so Mothercare looks unlikely to fold in the near future.
Shares in Sepura (LSE: SEPU) have lost around 66% of their value since the end of March after the once-high-flying critical communications services company announced that it was in talks with its lenders.
According to the company, order delays have hurt its working capital position putting short-term constraints on cash and forcing the group to consider raising fresh equity. After acquiring the Teltronic business last year, Sepura has been left with net debt of €119m and slower-than-expected receipts from customers have also put the company in a precarious position. As a result, Sepura is subject to those short-term cash constraints that it expects will require an extension to its banking facilities and a waiver of a possible covenant breach at the end of June. Talks are under way with major shareholders to raise around £50m through an equity fundraising.
This whole scenario is quite a clear warning to investors that they should stay away from Sepura. Management has shown that it’s unable to run the business effectively, and it has fallen on the shoulders of shareholders to foot the bill for the company’s mistakes. Sepura might be able to buy itself some time with a placing, but poor management means that it might be wise to avoid the company.
Running out of cash
Similarly, Gulf Keystone (LSE: GKP) has proven itself to be a poor steward of shareholder capital over the years and now shareholders face significant dilution if the company is forced to restructure its debts. Unless there’s a sudden dramatic increase in the price of oil, then Gulf Keystone is likely to run out of cash and headroom on its borrowing facilities this year. Once again, it will fall to shareholders to foot the bill for the company’s excess. Another firm it might be wise to avoid for the time being.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.