The Motley Fool

How low can Sirius Minerals, Thomas Cook, BT and other troubled shares go?

Plunging share prices often reflect deep trouble in a stock’s underlying business. But a sharply falling share price also attracts many investors who are fishing for a bargain.

But trying to pick a bottom on the chart of a falling share price is fraught with difficulty. On top of that, any investor flirting with declining share prices is presumably looking for the green shoots of recovery in an enterprise that will lead to the stock market reassessing a firm’s valuation and sending the share price back up.

Sign up for FREE issues of The Motley Fool Collective. Do you want straightforward views on what’s happening with the stock market, direct to your inbox? Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio. Click here to get started now — it’s FREE!

Downside potential

You’ve got to be an insightful analyst to get that one right. Get it wrong, though, and your investment could go down with the ship. But just how low can the share prices of troubled firms such as Sirius Minerals, Thomas Cook and BT go? The short answer, I reckon, is that they can go to zero. Indeed, all shares have the potential to become worthless. That might seem far-fetched with these three, but let’s skip through a potential scenario that could drive each share price to nought.

Wannabe polyhalite producer Sirius Minerals has no sales or profits and relies on securing outside funding before it can even build the mine it needs to extract its product for sale. Securing funding has proved to be difficult. Conditions in the financial markets could deteriorate further making funding impossible. Operating funds could run out and the firm may go bust.

Meanwhile, Thomas Cook is finding it difficult to trade profitably in an over-competitive and cyclical market. It needs refinancing. Trading could deteriorate further because of a cyclical slump in the market and even if the firm secures refinancing from outside investors now, it could still make trading losses. Investors may give up on the company and refuse to refinance it again, leading to bankruptcy.

And BT’s revenue, earnings and cash flow have been trending down for some time. That situation could continue and accelerate if a general economic slump pulls the rug from underneath the firm’s business activities. Meanwhile, the company carries a large pile of debt and a big pension obligation. The finances could become so poor that the company is not worth saving and it goes into administration.

Protect your investments from a wipe-out

Generally, I think it’s a good idea to think about the downside potential risks with any company that you buy shares in. But you can mitigate some of the risks by looking for good quality stocks such as those with underlying enterprises that have a strong trading niche in their markets.

A decent record of trading, strong balance sheet and a positive outlook can also help you pin down better shares. Or you may be more comfortable going for an index tracker fund, or managed fund, which would dilute the risks of investing in any single company because your funds would be spread across many shares within the fund.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.

Kevin Godbold has no position in any share 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.