Buying shares which have fallen heavily after negative news is highly challenging for investors. In the short run, such companies can deliver highly volatile performance, and this can even lead to paper losses for investors in the near term. In the long run, though, their lower valuations may mean there is a wide margin of safety on offer. This could translate into high capital growth.
With one company falling by over 20% at one point on Monday following a negative update concerning its operations, could it be worth buying right now?
A difficult outlook
The company in question is Petra Diamonds (LSE: PDL). It released an update on Monday concerning its operations in Tanzania, where it owns 75% of the Williamson Mine. The company confirmed that a parcel of diamonds from the Williamson mine has been blocked for export to its marketing office in Antwerp. As well as this, certain key personnel from the mine are being questioned by the authorities, with the reason for this action not having been disclosed to the company at this time.
In response, Petra Diamonds has suspended production from the mine. There is no guide in the update as to when production will recommence, and this situation could therefore hurt its forecasts for the current year. As such, investors are understandably seeking a wider margin of safety, which means its share price has been among the biggest fallers following the update.
With Petra Diamonds now trading on a price-to-earnings (P/E) ratio of 13, it appears to offer a wide margin of safety given its growth outlook. Next year it is forecast to post a rise in its bottom line of almost 100%, which puts it on a price-to-earnings growth (PEG) ratio of just 0.1. This suggests it could be worth buying now for the long run.
However, the reality is that the company may not be able to double its profitability next year. Its forecasts could change dramatically depending on how long the Williamson mine is suspended, which means its margin of safety may not be as wide as it first appears. As such, for the time being, it may be a stock to watch rather than buy – at least until more news is known about its outlook.
Another stock which does not appear to be worth buying at the present time is wealth management company Hargreaves Lansdown (LSE: HL). It has an excellent track record of growth, with its bottom line increasing at an annualised rate of 13% during the last five years. It also occupies a strong position within what is an increasingly consolidated sector, and this could provide it with further earnings growth potential in the long run.
However, with a P/E ratio of over 31, it appears to be significantly overvalued. Earnings are due to rise by 11% next year, which gives it a PEG ratio approaching 3. And with a dividend yield of 2.1%, it may be better to invest elsewhere for growth, value and income potential.
Peter Stephens has no shares in any company mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.