Buying a share which has fallen in price can sometimes be a shrewd move. It may provide a wider margin of safety than it otherwise would, and this can help to place the investment odds further in an investor’s favour.
However, on some occasions, a company’s share price may have fallen for a good reason. 88 Energy (LSE: 88E) may be one such example, with the stock’s market valuation having declined by 64% in less than four months. The company has endured a disappointing period, with its outlook relatively uncertain.
As with any oil and gas exploration company, 88 Energy has required significant sums of investment in order to make progress with its strategy. It recently launched a rights issue as it seeks to boost its financial resources ahead of further exploration activities. One of the problems facing the company, though, is the challenge of turning its potential into revenue and profitability. Flow tests have generally been disappointing, with the accessibility of potential reserves a key issue for the business.
Investors, it seems, are becoming increasingly uncertain about the company’s prospects. Alongside the recent downturn in the wider resources industry, this could mean that the 88 Energy share price remains weak in the near term. Investors seem to be increasingly ‘risk-off’, which could push them towards larger, more diversified and financially-stable businesses in the FTSE 350.
Clearly, the stock has the potential to recover. But given the challenges it has faced, it may only prove to be of interest to less risk-averse investors. Even though its rewards could be high, the near-term risks facing the business continue to be significant.
As mentioned, some share price falls can create more appealing investment opportunities. One company that could offer an improving share price outlook is Hargreaves Services (LSE: HSP). The diversified company, which provides services to the industrial and property sectors, released a trading update on Tuesday to coincide with its AGM.
The business is on track to deliver on its revised expectations. It has completed the sale of Brockwell Energy, with the net funds of £15m from the deal having been applied to reduce short-term overdraft borrowings. In the current year, it’s forecast to post an improvement in earnings, with a price-to-earnings (P/E) ratio of 13.5 suggesting that it could offer good value for money.
Clearly, the fall in Hargreaves Services’ share price of around 8% in the last year is relatively disappointing. The company has experienced a turbulent period, with one of its customers, Wolf Minerals, having ceased trading. The company, though, appears to be performing relatively well and has the potential to deliver a stronger financial performance in future.
While potentially risky and volatile, the stock could offer a margin of safety. Therefore, for less risk-averse investors who are seeking a possible turnaround stock, it may be of interest over an extended time period.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.