The Motley Fool

A 7% yield is no reason to buy these big losers

Investing in turnaround stocks is popular for a reason — get it right, and you can double or triple your money quite quickly. But it’s a risky habit. Troubled businesses often stay in trouble for longer than anyone expects.

One way to reduce this risk slightly is to limit yourself to the FTSE 350. Businesses at this level should generally have reliable auditors. They should also be able to raise cash by issuing new shares, or borrowing at reasonable rates, when needed.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

With these advantages in mind, I decided to take a look at the two biggest fallers in the FTSE 350 over the last 12 months. Is either of these firms worth buying?

A controversial pick?

The last year hasn’t been good for Sports Direct International (LSE: SPD). The firm’s shares have fallen by 55%, and its profits are expected to fall by a similar amount this year.

Mike Ashley, the firm’s colourful founder, has now taken charge, assuming the role of chief executive. But Sports Direct faces headwinds on a number of fronts. The weak pound means that import costs are increasing, as most Asian manufacturers sell in US dollars. Operating costs are also expected to rise by 8%, as a result of the national minimum wage and other changes.

Some of these increases should be offset by rising sales. Sports Direct expects revenue to rise by 9% this year. The firm also has a strong balance sheet, with very little debt.

Sports Direct is continuing to expand its store chain and invest in property. I expect Mr Ashley will manage to pull off some kind of turnaround. What’s less clear is whether the firm’s profit margins will return to historic levels, which were higher than those of most other high street chains.

I don’t see any reason to rush in. I plan to wait until Sports Direct’s half-year figures are published in December, before reviewing the situation again.

More trouble ahead?

Electronics firm Laird (LSE: LRD) has lost 61% of its value over the last 12 months. The vast majority of this was the result of October’s profit warning, when the shares fell by more than 50% in one day.

That’s a very big fall for a single profit warning. The shares now look quite cheap based on the latest broker forecasts, which imply a forecast P/E of 9.6, and a yield of 7%. Is this an opportunity to grab a bargain?

I don’t think so. I believe Laird shares have fallen this far because the market believes the firm is going to have to raise cash from investors. The group’s statement on 19 October made it clear to me that debt is likely to become a big problem. Although net debt should be less than Laird’s banking limit of 3.5 times EBITDA at the end of the year, it’s likely to be close.

Laird’s problems are the result of lower-than-expected production volumes, and price pressure from big customers. It’s not clear to me how the firm will be able to reduce its debt levels.

I’m fairly confident that an equity placing or rights issue will be needed at some point. Until that happens — or the group’s debt falls significantly — I’m going to steer clear.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Roland Head has no position in any shares mentioned. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.