One of the most unpleasant investing clubs is the ‘90% Club’, which includes companies whose share prices have fallen by nine-tenths or more. Many FTSE 250 – and even FTSE 100 – firms have tumbled into the 90% Club.
A few of these ‘fallen angels’ rise again, and some go on to greater glory. A sizeable proportion become ‘fallen devils’ and their share prices never recover, as an old rule of the stock market says, “A share that has fallen 90% can fall another 90%.” The 90% Club’s worst members go on to lose all of their value.
This former FTSE 250 share has lost its Dignity
One recent recruit to the 90% Club is former FTSE 250 member Dignity (LSE: DTY), which has lost its good name as well as over 90% of its market value.
After Co-op Funeralcare, Dignity is one of the UK’s leading funeral directors. (By the way, never confuse Dignity with Dignitas, which is the Swiss euthanasia – assisted dying – provider.)
When Dignity floated in 2004, I recommended its shares to Fool readers (article since archived). I argued that customers were quite literally dying to use its services at a rate of 50,000 a month.
By raising prices steadily above inflation, Dignity and other funeral providers made their services ever more expensive. By October 2016, its shares had risen more than tenfold, peaking at around 2,820p. This valued Dignity at around £1.4bn, placing it firmly within the FTSE 250 index.
Another FTSE 250 share joins the 90% Club
Endlessly pushing up prices worked a treat for Dignity shareholders – until it didn’t. In March 2019, the Competition and Markets Authority (CMA) launched an in-depth investigation into funerals. This sent its shares plunging, coming on top of steep falls in 2017 and 2018.
Dignity shares now trade at 270p, down 90.5% from their all-time high. During the market collapse earlier this year, they dipped to 210.5p on 6 April. Also, they are down nearly three-fifths (58%) over the past 12 months. Today, Dignity is worth a mere £135m.
Coronavirus wrecked Dignity’s revenues
You’d expect a much higher death rate to be positive for funeral-care providers. But lockdown restrictions mean that big, well-attended events are forbidden. As Dignity makes big profits from extras and add-ons, having basic, low-priced funerals has brutally bashed its business model.
Will Dignity be a recovery share or a fallen devil?
For many firms, the 90% Club is a lobster pot they fall into and never escape. But a few hardy survivors turn their situation around and get out of this trap. While it’s extremely difficult to differentiate between recovery shares and fallen devils, I think Dignity has a decent chance of becoming a defensive business again.
Dignity expects continued downward pressure on the average price of funerals and cremations. At today’s 270p, its shares are priced more for Armaggedon than heaven, but they are cheap as chips.
In 2019, Dignity turned over £339m and made pre-tax profit of £44.1m, which generated earnings per share (EPS) of 69.8p. If EPS dived to just 50p in 2020, Dignity shares would have a price-to-earnings ratio of just 5.4. The dividend, cancelled in 2019, is unlikely to reappear before late 2021 at the earliest.
For me, Dignity’s shares can grow sustainably from this rebased level, not least because it’s a fairly simple business. Also, many of its smaller rivals may go bust or be taken over to boost Dignity’s market share. As a high-risk bet, this former FTSE 250 share is not suitable for all, but I’d buy Dignity shares today.
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Cliffdarcy 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.