I’ve long been warning how Lookers (LSE: LOOK) could prove to be a shocking investment trap. Though it brings me no pleasure to say it, the 56% share price drop the car dealership’s endured over the past three months alone has vindicated my pessimism.
I spoke recently about the prolonged decline in new car sales in the UK, an issue caused by increased uncertainty from consumers and businesses alike in light of the unresolved Brexit problem. But as recent data from the Society of Motor Traders and Manufacturers (SMMT) shows, this political fog isn’t the only headwind Lookers et al are being swept over by.
News of a 4.9% decline in total new vehicle sales in June was bad enough, worsening from the 4.6% annual drop recorded a month earlier. What the auto body said caused it “grave concern” though, was the sharp demand drop last month for low emission cars such as hybrids and hydrogen-powered units. Sales of these vehicles dropped for the first time in 26 months on what the SMMT described as a combination of “confusing policies and the premature removal of purchase incentives.”
Looking good? No way
It would take a braver man than me to plough into Lookers right now, even though at current prices it trades on a rock-bottom forward P/E ratio of 5.1 times and carries a monster 9.1% dividend yield.
The extent of the company’s problems were highlighted on Friday when it hacked its profits estimates for the half year down to £32m (versus profits of £43m a year earlier). And I reckon this is unlikely to be the last time Lookers reduces its forecasts given the scale of market deterioration.
A 4.6% decline in new vehicle sales during quarter two is bad enough, deteriorating from 2.4% in the prior three months. “Weaker demand and the resulting margin pressure” at its used-car division in the last quarter really compounds the retailer’s woes.
With the political and economic uncertainty that’s smacking car demand promising to persist long into the future, and Lookers also facing an FCA probe into its sales processes, there’s plenty of scope for the company’s share price to keep on sinking. I reckon it’s a stock that should be avoided at all costs.
A better buy
Those looking for solid dip buys would be better off examining Georgia Healthcare Group (LSE: GHG) instead, I believe. The business, which provides a range of healthcare services (like hospital care and drugs dispensing) in the fast-growing Eurasian nation, is experiencing some stupendous revenues growth right now.
According to its most recent quarterlies, sales expanded 13% in the period to April. I’m expecting the top line to keep impressing as Georgian economic growth balloons, and the group works (and spends) heavily to expand the quality and range of its operations. On Friday, for instance, it announced it would lease space to maternity care specialist the David Davarashvili Clinic at its Iashvili Hospital in Tbilisi, a significant boost to neonatal and paediatric services at the site.
Georgia Healthcare’s share price has fallen 12% over the past month, meaning it trades on a bargain-basement forward PEG ratio of 0.5 times. Given that City analysts expect the medical mammoth to keep delivering stunning double-digit annual earnings growth, I reckon it’s a great buy today.
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Royston Wild 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.