As I write, the FTSE 100 is down a huge 9%, to 5,340 points, and could soon fall below 5,000. Some shares have crashed more than 30% on the day.
The latest slide comes after the US travel ban on visitors from 26 European countries. If you’re a long-term investor looking for oversold stocks, I think the next couple of months could provide the best buying opportunities for years.
But not all big fallers are big bargains. Here are two I’m avoiding.
Shares in Cineworld Group (LSE: CINE) lost almost 50% of their value on Thursday morning after the firm released 2019 results. But it looks like that was maybe an over-reaction. As I write, early afternoon, the price has rebounded to a more modest 15% drop on the day.
It’s still not been a good time for investors, mind, as Cineworld shares have fallen 75% over the past 12 months. As my Motley Fool colleague G A Chester has observed, Cineworld’s balance sheet and cash flow situation are causes for concern.
Share sales made to meet a margin call on a loan taken out by an entity connected with the CEO and deputy CEO? Perhaps my idea of corporate governance is old-fashioned. But if that’s the kind of position the bosses can get themselves into, I don’t want to buy shares in a company they’re running.
The 2019 figures show modest falls in revenue and EBITDA, largely in line with expectations. The firm also told us that net debt (excluding leases) has fallen, so is that reason for good cheer? Well, the debt level still stands at $3.5bn, which makes my eyes water. It represents 3.4 times adjusted EBITDA, when I’m wary of anything above around 1.5 times.
And why the company has declared an increased dividend while under that debt pressure is something I find incomprehensible. Cineworld gets a big ‘no’ from me.
Travel firms are being hit especially hard as the world coronavirus lock-down progresses. I’ve previously suggested that the biggest firms are likely to be oversold and could provide contrarian buying opportunities. But what about Go-Ahead Group (LSE: GOG), whose shares slumped 30% on Thursday?
Normally, I might see Go-Ahead as a stock to buy for long-term dividends. But it’s another company with high levels of debt. Debt can be a perfectly good way to fund a business when things are going well. It can, in fact, help gear up a company’s profits if it can borrow money at a lower rate than the return it can get from its business.
But it’s times like the present when debt can be a killer. Adjusted net debt has been impacted by the adoption of IFRS 16. But at 28 December, it stood at £931.6m.
That’s around 7.5 times annualised operating profit based on the first half, and the second half could be considerably tougher. The firm said: “While it is unclear how the coronavirus situation will evolve in the coming weeks, travel patterns are likely to be impacted in the second half of the year.”
Impacted they surely will be, as avoiding going on bus and train journeys is right up there among the top anti-pandemic measures.
Big travel firms with the financial muscle to sit out the downturn, yep. But smaller companies with big debt? I say nope.
It’s ugly out there…
The threat posed by the coronavirus outbreak has spooked global markets, sending stock prices reeling.
And with the Covid-19 virus now beginning to spread beyond of China and Italy, it seems very likely that the bull market we’ve enjoyed over the past decade could finally be coming to an end.
Against such a backdrop of market worry, it’s little wonder that many investors are starting to panic. (After all, nobody likes to see the value of their portfolio fall significantly in such a short space of time.)
Fortunately, The Motley Fool is here to help, and you don’t have to face this alone…
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Alan Oscroft 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.