Stock pickers who put money into companies on the brink are the folk heroes of investing. It’s hard to read about a steely-eyed fund manager who sees value where everyone else sees only risk (through their fingers, from behind a sofa) without wanting to get in on the action.
Forget the potential returns – the sheer act of buying in the face of fear seems as close as investors get to heroism. Sort of Andy McNab meets Andy the Accountant.
In truth however, it’s a lot harder than may seem in retrospect to determine which stocks will make the sort of legendary recoveries enjoyed by Apple at the turn of the century, or more recently Barratt Developments (LSE: BDEV). The latter rose tenfold following the financial crisis, but its share price had previously declined more than 95% on the very real concern the homebuilder was about to go bust.
And know that companies do indeed go bust, or dwindle to irrelevance. Most of us have heard rallying cries exhorting us to “invest for the long-term” or “buy when there’s blood on the streets” but the evidence backing such generalities applies to markets as a whole, not to individual companies.
Stock markets go through booms and busts but – short of war or revolution – they do eventually bounce back from setbacks, and on a decades-long chart they usually end up much higher.
But companies often go to zero – to the extent that telling you about the failures of yesteryear is pointless as many of you will just shrug and ask, “who are they?” They’ve vanished from our consciousness as well as from our portfolios.
Still fancy your chances at finding a basket case that turns out to be a pot of gold? Here are three companies currently in crisis!
Metro Bank (LSE: MTRO)
Here we have a classic crisis situation. As recently as March 2018, shares of Metro Bank (LSE: MTRO) traded above £40. With its friendly branch-first strategy – including seven day a week opening and saucers of water for its customers’ dogs – the seven-year-old challenger bank was the toast of the City, with its shares rated much more highly than legacy operators like Lloyds (LSE: LLOY) or RBS (LSE: RBS).
But Metro’s shares have fallen 75% since January, after the bank said it would need to raise £350m to fill a hole arising from an accounting error. That would be bad enough – the last accounting black hole many of us remember is Patisserie Holdings, which ultimately went bust, although it’s important to note there’s no suggestion of fraud here, just incompetence. But with banks a loss of confidence doesn’t just mean slumping share prices, it can also hit a bank directly if frightened customers start withdrawing their money. Such fears sent the shares down 11% on Monday.
Metro says its fundraising talks are well advanced, and it aims to complete the raise by the end of the second quarter. If you’re a believer, it might be a bargain.
Centrica (LSE: CNA)
Not everyone would agree energy supplier Centrica (LSE: CNA) is in crisis. Milking its vast customer base continues to throw off cash, the business is profitable, and the dividend yield is well over 10%. However that sky-high dividend yield also warns us that the market is sceptical about Centrica’s prospects – as does a share price down more than 75% since 2014.
Centrica has lately suffered problems ranging from the government’s default tariff cap and warm weather to nuclear outages. But I believe the core issue is more fundamental. The owner of British Gas lost 742,000 of its 25 million customers last year, and in an era where switching to a cheaper provider requires just a few button clicks I don’t see why it won’t lose more, or at least see margins shrink further. To top it all, Jeremy Corbyn’s Labour Party says it will privatise the utilities if elected.
At least Centrica looks cheap. If you feel there’s still gas in this tank (sorry) then it could be a turnaround candidate.
Superdry (LSE: SDRY)
It sometimes seems as if clothing store Superdry (LSE: SDRY) has lived its decade-long life as a public company veering in and out of crisis. Its shares have several times run up towards £20 only to slide precipitously. They now languish around £4.50 after falling 80% since the start of 2018.
Superdry has posted falling margins for years and as in-store sales have slowed, many have questioned the future of the brand – including the founder, Julian Dunkerton, who sold a large chunk of his own shares after leaving the firm in March 2018. However in a stunning reversal, Dunkerton has since rejoined Superdry as chief executive. He led a boardroom coup that saw the incumbent chief executive, chairman, and chief financial officer all walk out the door. Even Superdry’s corporate brokers resigned.
It’s difficult to build up an international brand in the fickle world of fashion. Dunkerton achieved that, but can he – effectively – do it twice? We’re likely to see a few rough reports as his new team ‘kitchen sinks’ everything it doesn’t like and blames it on the departed. Beyond that, if Superdry can rediscover its mojo then perhaps another tilt towards £20 for the shares isn’t out of the question?
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Owain Bennallack has no position in any share mentioned. The Motley Fool UK has recommended Lloyds Banking Group and 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.