Fallen stars: Is the worst over for Sports Direct International plc, Rolls-Royce Holding plc and Restaurant Group plc?

It’s fair to say that a number of companies have endured a shocking first half of 2016. Let’s look at three examples and question whether investors should pile back in.

Losing streak

After concerning reports about the treatment of its workforce, Mike Ashley’s reluctance to face questions from a House of Commons committee and his admission to journalists that profits had fallen, Sports Direct (LSE:SPD) shareholders have had an awful time. Peaking at just under 900p back in March 2014, the shares now trade for 363p, a 60% drop in just over two years.

The slide could continue if Mr Ashley fails to attend the business select committee hearing on 7 June, which he only agreed to do if MPs visited the retailer’s factory in Shirebrook. That invitation was declined. Then again, if he does appear and fails to provide satisfactory answers to the committee’s questions, the impact on the share price could be even greater. 

The company has performed extremely well over the last eight years or so (its share price was only 33p in 2008). Forthcoming events, such as Euro 16 and the Rio Olympics should also encourage more people to engage in sport and visit the retailer. And while further volatility might be coming, the shares already look cheap on a price-to-earnings (P/E) ratio of under 11. That said, even if earnings do recover, the unpredictable behaviour of its founder may be too much for some.

Rolling back to life

After numerous profit warnings, shares in Rolls-Royce (LSE:RR) plummeted from 1,206p in January, 2014 to just 538p in February. The slight recovery since to 605p is a positive sign, but will things continue to get better for the £11bn cap?

Given the strong order book and consistent earnings from maintenance contracts for their engines, I’m optimistic about the company’s long-term future. And although I’m reluctant to put too much faith in management teams, the relatively new CEO, Warren East, does have a reputation for getting things right from his time at ARM. His commitment to removing layers of management and simplifying operations is encouraging.

Rolls-Royce announces its half year earnings to the market on 28 July. Should the news be positive (or just less negative), the shares could rise significantly.

Tough times

Since dropping to 273p last month, shares in Restaurant Group (LSE:RTN) have bounced back to 349p. The appeal for value investors is easy to understand. Here’s a company that, until recently, had consistently managed to grow earnings and hike dividends over a number of years. Indicators of quality, such as impressive levels of return on capital and high operating margins made the investing case even sweeter.

Trouble is, I’m not seeing anything to suggest that the company’s fortunes will significantly improve. The boom in online retailing means that fewer people are visiting big retail parks (where a lot of its restaurants are). Moreover, consumers are now spoilt for choice when it comes to eating out. Why restrict yourself to regularly visiting one of its sites when there are so many other food outlets to try? In my view, its brands seem tired and distinctly average. 

Like fashion retailing, Restaurant Group competes in a crowded market, susceptible to trends and changes in consumer spending. While all is not lost, I feel this is a recovery stock for very patient investors who can stand a likely dividend cut.

Most companies experience tough times at some point. While some problems will be beyond the control of management (such as the recent oil price slump), investors should consider retaining their shares if a board appears to be taking action where it can. If the business model and strategies remain sound, periods of volatility can often present shareholders with a chance to increase their holdings. As always, a detailed and dispassionate evaluation of a company is advised before any decisions are taken.

That said, some businesses have better prospects and are generally more resilient than others. If you’re looking for strong companies with relatively consistent earnings and dependable dividends, the experts at the Motley Fool are here to help. They produced a special report highlighting five shares that would be worthy additions to any retirement-focused portfolio. Better still, this highly readable report is free so grab it while you can.

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Paul Summers owns shares in Rolls Royce Group. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.