After a market crash, stocks can look more attractive because they are trading at cheaper prices. I love a bargain, but I firmly believe that cheap prices do not necessarily translate into good value for money. In the aftermath of a crash, investors need to look for the opportunities, but avoid the pitfalls.
With this in mind, one high-risk and potentially high-reward stock that I’m keeping an eye on is global automotive distributor Inchcape (LSE:INCH).
Market crash opportunity or too risky?
INCH operates a handful of UK dealerships by partnering with manufacturers. Its primary business is as a global automotive distributor. INCH takes ownership for marketing, distribution, dealer management, and after sales for manufacturers.
When the market crash struck, INCH lost approximately 40% of its share price value. From nearly 700p per share, Inchcape’s price tumbled to a low of 420p. At the time of writing, shares can be purchased at just over 500p per share which is still cheap in my opinion.
The global automotive industry is in decline and the market crash has not helped. Covid-19 first hit in China, a centre for many car manufacturers, and factories were shut down. Global sales of passenger cars are forecast to fall to 59.6m units in 2020. This is down from a peak of 79.6 in 2017. In regards to INCH specifically, it is not reliant on just the UK market as it is a global company. This means it doesn’t need to rely on one region in respect of performance.
Performance and outlook
City analysts today upgraded Inchcape’s outlook. The company’s earnings are under severe pressure in the short run amid the market crash. This is noted by the last month’s interim results which showed revenue down by 36% and underlying profits down 84%. Despite these figures, analysts feel the tide is about to turn.
Inchcape possesses a robust balance sheet which would put my mind at ease as a potential investor during the current downturn. At the end of June, INCH reported total liquidity in excess of £1bn, consisting of available cash of £480m and £530m headroom in its revolving credit facility.
Inchcape’s trading update in July also confirmed the appointment of new chief executive officer Duncan Tait. Despite a history of technology service focused roles, Tait has lots of experience of working with the automotive industry in these roles on many key projects.
Overall it would be easy for me to sit on the fence with Inchcape. One on hand, it has a strong balance sheet and a history of strong performance. Analysts are predicting an upturn in its future. On the other hand, the automotive sector has been badly affected by the pandemic. No one can predict when the tide will turn, which is worrying for me as a potential investor.
Ultimately, I would class Inchcape as a high-risk, high-reward stock and personally would not invest right now. I would definitely keep an eye on developments with the new CEO in place to see what steps are taken to stimulate performance. I just feel there are alternative stocks out there that are in less risky industries, which can be picked up cheaper due to the market crash.
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Jabran Khan 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.