Buying shares that have declined significantly, and consistently, over an extended period can be a risky move. In the short run, it could equate to paper losses for the investor, since it can be tough to find the bottom of a stock’s fall in market value.
In the long run, though, recovery shares can deliver high rewards. Advanced semiconductor wafer company IQE (LSE: IQE) could therefore be of interest to less risk-averse investors after its 30% fall in one year. However, does the stock offer good value for money after its fall? And is it worth buying alongside another unpopular share after it released a trading update on Wednesday?
The company in question is housebuilder Redrow (LSE: RDW). It released a trading update to coincide with its AGM, with the company trading in line with expectations in the first 18 weeks of the financial year.
Although the London sales market has been subdued due to Brexit uncertainty and high Stamp Duty rates, the business has seen good demand across its regional businesses. The sales rate per outlet per week over the period was 0.64 versus 0.67 from the same period of the previous year, with the fall due to a slower London market.
Alongside its trading update, the company announced that Executive Chairman and Founder of the business Steve Morgan will stand down in March 2019. He will be replaced by current CEO John Tutte.
Looking ahead, Redrow is due to post a rise in earnings of 4% in the current year. This puts it on a forward price-to-earnings (P/E) ratio of 6.3, which suggests that it is exceptionally cheap at the present time. With Help to Buy set to continue and demand for new homes being healthy, the stock appears to offer significant recovery potential after falling by 13% in the last year.
IQE also appears to have an improving financial future. The company recently reported improved financial performance, with it being on track to deliver on its guidance for the full year. Next year it is expected to post a 43% rise in net profit, which has the potential to improve investor sentiment towards the business. And since it now has a price-to-earnings growth (PEG) ratio of 0.5 following its share price fall, it appears to offer a margin of safety. This could put the risk/reward ratio further in an investor’s favour and may signal that the stock offers strong growth at a reasonable price.
With management changes ahead for the business, it appears to have an improving outlook. Its new CFO is due to start work in the New Year. He has worked in the same capacity at ARM, and could bring additional experience and expertise to the company. This could help to improve investor sentiment over the coming months as the business gradually moves ahead with the implementation of its strategy.
Although the IQE share price may continue to be volatile in the short run and further falls cannot be ruled out, it appears to offer a low valuation as well as improving financial prospects. Therefore, for less risk-averse investors it may offer investment appeal.
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Peter Stephens owns shares of Redrow. The Motley Fool UK has recommended Redrow. 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.