This year’s market crash has left some companies’ shares at staggeringly low levels. The FTSE 100‘s three worst-performing stocks of 2020 are down 65%, 63%, and 59%. They could represent big opportunities.
Time to be greedy?
Legendary investor Warren Buffett has famously advised investors to “be greedy when others are fearful”.
Is it time for brave contrarians to be greedy, and buy into the Footsie’s biggest fallers? After all, if these stocks recover, the returns could be spectacular!
Worst-performing stock #1
Airlines are facing an unprecedented crisis due to the Covid-19 pandemic. Unsurprisingly, International Consolidated Airlines (LSE: IAG) is the Footsie’s biggest faller this year.
The owner of British Airways, and carriers including Iberia and Aer Lingus, dashed to preserve cash by all means possible. However, it’s had to go further to reduce financial leverage and increase liquidity. A month ago, it proposed a rights issue to raise up to €2.75bn.
We’ll get the details after the proposal is approved by shareholders at an AGM on 8 September. But it’s safe to say it’s going to be painfully dilutive. I’d assume at least 50%, based on the €2.75bn target and IAG’s current market capitalisation of £4.3bn.
Buffett sold all his US airline stocks after the pandemic struck. He reckons “the world has changed for the airlines.” I tend to agree, and plan to avoid IAG while there’s so little clarity on the industry’s future.
Worst-performing stock #2
I’m more optimistic about the prospects of Rolls-Royce (LSE: RR). This despite its exposure, through its civil aerospace division, to the same uncertainties as IAG. And despite the possibility it too may have to raise cash.
In last week’s half-year results, management told us it’s reviewing a range of funding options to bolster its balance sheet. As things stand, though, it looks to be hoping a combination of an improving macroeconomic backdrop, cost-cutting, and asset disposals will just about enable the group to trade its way through.
It reported a resilient performance by its defence business during the first half of the year, and a recovery in its power systems division after earlier disruption in some end markets. Meanwhile, it is radically resizing civil aerospace in the expectation of a smaller post-Covid-19 market.
On balance, I see RR as a decent ‘speculative buy’. I would, though, hold back some cash to participate in the event of a discount fundraising.
Worst-performing stock #3
ITV (LSE: ITV) shares may not have fallen quite as far as IAG’s and RR’s. But near to 60% is still a heck of a drop. Indeed, absent an unlikely big leap in the share price in tomorrow’s trading, ITV is set to be demoted from the FTSE 100 in the latest quarterly reshuffle of the index.
I really don’t understand why this one is quite so unloved by the market. It remained profitable in the first half of the year, despite having to halt production at its studios during lockdown and suffering a big drop in advertising revenue to boot.
We’re told production has now largely resumed, and the company is seeing some signs of improvement in advertising. Also that it has sufficient financial flexibility to cope with a second wave of the pandemic, and to continue investing in data, technology, online, and streaming.
I can only see ITV as an attractive ‘long-term buy’ at the current discount level.
G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. 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.