The investing world is littered with the walking wounded of the tormented past few years, with so many previously solid companies (together with a few recent high flyers) down in the dumps.
Superficially, at least, it looks like it could be a good time for contrarian investors looking for oversold bargains. But is it really?
Kier Group (LSE: KIE) is one example, as it has been hit by the same combination of construction malaise and high debt that saw off Carillion. Since new chief executive Andrew Davies took the helm, Kier’s focus has been relentlessly on the balance sheet, with assets and jobs shed across the board.
Downside
I painted my picture of the downside of Kier Group as an investment recently, and since then I’ve had someone ask me when I think it will be safe to buy Kier shares again, and what price will make for a great recovery investment. Because, surely, there will be a price that’s too low, won’t there? How low can it actually go?
Well, Kier shares are currently trading on a P/E multiple of only around 1.5. While, other things being equal, a lower P/E is better, a valuation that low means only one thing — the bulk of the market is seeing Kier Group as providing no value at all to existing shareholders.
That kind of valuation, as my colleague Royston Wild put it, is “practically loaded with flashing red lights.“
Kier shares are priced for one of two outcomes — that the company will go bust, or that it will be rescued and refinanced in a way that wipes out current shareholders.
Others in trouble?
I smiled when I saw Royston comparing Kier to Purplebricks and asking which is better, as the question seems a bit like asking ‘which would you rather have, measles or chicken pox?’
Since their peak, Purplebricks shares have lost 75% of their value, as the company has massively overstretched itself long before it’s close to making any profits. And, at the end of the day, it’s just an estate agent — albeit one that’s spent a fortune on advertising.
Purplebricks is another that I think faces a realistic chance of going bust or needing a share-killing bailout, and even after the crash, I think the shares are way overvalued at 112p.
Laid low
But what about really, I mean really, fallen shares, like Thomas Cook Group at just 5p? They’ve dropped 95% over the past 12 months, so how much further can they actually go?
The current price is the result of another big fall after news of a £750m bailout bid from Chinese conglomerate Fosun, which would most likely hand the rescuer the lion’s share of any newly-capitalised company and effectively leave those who currently own shares with very little of value.
The 5p shares could lose anything up to a further 5p, and I’m not touching them.
Beware bottom-picking
For contrarian and recovery investments to work, you have to be looking at fundamentally sound companies that can be brought back to a solvent state without too much equity dilution, not at actual dead dogs.
And that’s what I’m seeing here — three investments that could lose all your cash. Remember, however low a share has fallen, it can still drop another 100%.
