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These 3 FTSE 250 stocks have slumped over 20%. Is it time to buy?

Construction and outsourcing firm Kier (LSE: KIE) is down 21% year to date, house-builder Crest Nicholson (LSE: CRST) has lost 38%, and online clothing retailer N Brown (LSE: BWNG) has dropped a massive 58% — and been kicked out of the FTSE 250 to boot. Do I think it’s time to buy these savaged stocks?

Long and short of it

The table below shows forecast price-to-earnings (P/E) ratios and dividend yields for the three companies. It also shows what mainstream City brokers are recommending to their clients (source: WebFG), as well as a summary of current short positions in the stocks — that’s to say, bets on their share prices falling — held by sophisticated hedge funds (source: UKShortTracker).

  Kier Crest Nicholson N Brown
P/E 6.7 5.9 5.2
Dividend yield 8.3% 9.7% 7.7%
Broker recommendations 7 buy, 1 neutral 3 buy, 6 neutral 3 buy, 4 neutral
Short positions 13.3% (12 institutions) 5.7% (5 institutions) 4.1% (4 institutions)

As you can see, P/Es are super-low across the board and dividend yields are huge. No City brokers are negative on the stocks — indeed, a good number are positive — but there are hedge funds holding significant short positions. In my experience, it pays to be extra cautious when assessing stocks with high levels of short interest.

Kier’s hardiness questionable

Kier is currently the most heavily shorted stock on the London market. I agree with my colleague Roland Head that its net debt is too high for a low-margin business. Furthermore, since the collapse of sector peer Carillion, awarders of contracts are paying closer attention to the financial strength of bidders. Kier’s current level of debt could be a hindrance to winning new contracts, in my opinion.

Debt isn’t the only reason for the large short position here. Kier sports a number of other possible ‘red flags’ that Carillion had displayed, including reverse factoring, joint venture usage, and myriad annual exceptional items. Add these accounting complexities to the high debt and this is a stock I’m happy to avoid.

Crest of wave passed

Crest Nicholson issued a profit warning last month, saying the market for new homes in London, and at higher price points in the south of England, had been tougher than anticipated. I’ve been banging on for a year about how low P/Es and high yields, combined with high margins and high price-to-tangible book values (P/TBVs), are top-of-the-cycle features of the boom-and-bust house-building industry.

I’m interested in house-building stocks when the P/TBV is at, or below, one. Crest Nicholson is getting there, but isn’t quite there yet, with its P/TBV having fallen to 1.1. As such, it’s a stock I’m still avoiding, but one I’m keeping a close eye on. I view a reduction in short positions since the profit warning and a recent big share purchase by the executive chairman as further signs we’re getting near-value territory.

Browned off

N Brown is transitioning to an online-only business but growth is being handicapped by falling offline sales, and the tough retail environment. Aside from seeing only the very strongest businesses in the retail sector as worthy of investment consideration, Brown’s reliance on revenue from charging customers high interest on paying by instalments, further weakens it as an investment candidate, in my eyes. Another negative is a recent profit-denting draft ruling in a VAT dispute the company is involved in with HMRC. This is a stock I’d avoid even if there were no short positions in it.

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G A Chester 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.