Falling knives don’t come much faster and sharper than this one.
Kier we go
Construction firm and civil engineer Kier Group (LSE: KIE) is down almost 30% in the last week, 62% over the month and 92% over the year amid a blizzard of emergency rights issues, profit warnings and board resignations.
Some brave Fools will see this as a buying opportunity.
A falling knife like this one focuses the mind. Day traders see the potential to make a quick killing, long-term investors are hunting for value. Both are playing a dangerous game.
Knives are out
First, inure yourself to the daily news flow. On Friday 14 June, the Kier share price tumbled 36% in a day after newspaper reports suggested it was seeking to offload its housebuilding business for between £1oom and £150m, less than half its previous value.
Last Tuesday they leapt 6%, then another 10% on Wednesday, tempting glory seekers. Be careful. I’ve learned one thing about falling knives, they can fall for much longer than you think. Don’t grab too soon.
Kier Group is tempting, though. Management is battling to turn things around, suspending the dividend and looking to cut about 1,200 out of 18,000 jobs to deliver annual cost savings of around £55m from 2021. Whole divisions will be offloaded. Non-core activities in property, facilities management and environmental services will go.
If tempted, the first question to ask yourself is why am I even considering buying such a stricken beast? Trading at just 1.9 times forward earnings, it is certainly dirt cheap. That also shows how much investors hate the stock and they have good reasons for doing so.
Do you think it has been oversold, and could be due a revival? Maybe it could, but my experience is that bad news tends to dribble out over time, and there could be more trouble ahead. The kind of bounces we have seen may have dead cat characteristics.
Or maybe you think now is a good entry point and if you hold for five or 10 years it has plenty of time to come good. I am more receptive to this argument. Most investors work to far shorter timeframes than you and I. If you can stick it out for the long run, there is a chance you could one day be glad you bought Kier Group stock at just 131p.
Down or out?
However, not every stricken company recovers. Kier could go a similar way to sector rivals Carillion (insolvent) and Interserve, (seized by creditors). Or lose its way for years and years as the market loses interest. Then you’ll be sad you bought. It’s a gamble.
There may be further blows, especially with Boris Johnson hinting at axing the unloved HS2 high-speed rail line, which Kier works on, if he wins the Conservative Party leadership.
Maybe you believe there is a decent business in there. New chief executive Andrew Davies reckons thinks there is, highlighting its four core groups – infrastructure, regional construction, utilities and road maintenance. That might be a reason to buy. Just make sure you understand why you are buying and brace yourself for hidden surprises. I’m not touching it.
Harvey Jones 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.