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Could this year’s biggest FTSE 250 fallers be 2019’s biggest winners?

In a poor year for equities generally, the mid-cap FTSE 250 has been the worst performer of London’s main indexes. It’s down 14% year to date, compared with declines of 12% for the blue-chip FTSE 100 and 11% for the FTSE SmallCap.

The three FTSE 250 stocks that have fallen most have lost in excess of 65% of their value. Fashion retailer Superdry  (LSE: SDRY) is down 66%, holidays group Thomas Cook  (LSE: TCG) has slumped 75% and pharmaceuticals firm Indivior  (LSE: INDV) has shed an incredible 80%.

Clearly, these three stocks would deliver massive gains for new investors today, if they were return to their former levels. Could it be time to load up for a recovery in 2019?

Market darling

The Superdry share price hit a new all-time high in the first week of January. However, it’s been downhill ever since, with the decline only magnified by a high valuation as a market darling to begin with. It was trading on a forward price-to-earnings (P/E) ratio of 22 at the start of the year. Today, the forward P/E is just 8.3.

With the company pinning a profit warning in October on unusually warm weather, and with co-founder Julian Dunkerton, who left earlier this year, now agitating to rejoin the business, Superdry fans may find it easy to envisage a return to the glory days. I’m not convinced. The company’s underlying operating margin has declined each and every year since 2013, pointing to longer-term issues than the recent spell of problem weather. I’m uncertain as to when and where the falling margin will bottom out, so I’m avoiding the stock for the time being.

Double profit warning

Things have gone from bad to worse for troubled travel giant Thomas Cook this year, with the company issuing a second profit warning just two weeks ago. Weather was again the problem. In contrast to Superdry, which at least has a decent balance sheet and well-covered dividend (yielding 4.6%), Thomas Cook reported net debt of £389m (up from £40m a year ago) and suspended this year’s dividend.

The company said it remains compliant with its banking covenants, but I view the level of debt as a huge risk in what is a highly competitive low-margin industry. I’m not tempted by a forward P/E of just 4.1, and see this as a stock to avoid, due to the severity of the downside risk of debt spiralling out of control.

Suboxone setback

Indivior, which specialises in the treatment of opioid dependency, has been fighting a losing battle this year in trying to protect its biggest-selling drug, Suboxone Film, from generic competition in the US. It’s reckoned Indivior’s branded product could lose up to 80% of its market share within months of the launch of a generic rival. And indeed, City analysts have pencilled in an 80% collapse in earnings for calendar 2019, such is the company’s heavy reliance on Suboxone.

Indivior reckons it has a strong pipeline of new product candidates. However, uncertainty in this area (it has reported slower-than-expected commercial uptake of one recently-launched product) and a relatively high forward P/E of 19.7, lead me to conclude this is another stock to avoid.

Unfortunately, I haven’t been won over by the recovery potential of this year’s three big FTSE 250 flops. However, I’m far more optimistic that some of the biggest FTSE 100 fallers could be among 2019’s biggest winners.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Superdry. 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.