‘Buy the dip’ is sage advice that many individual investors heeded during the pandemic-induced lows of 2020. Whilst technology ‘growth’ stocks continued to boom, many traditional dividend-paying ‘value’ stocks suffered badly during the first half of 2020. Yet today many of these stocks have gradually recovered to something approximating their pre-pandemic levels, and investors who bought their dip will have mostly recouped big gains.
These gains are in part because investors are starting to see an eventual return to ‘normality’ after the black swan event of 2020; and also because of the rotation from growth stocks back into value stocks that I identified in my post of December 2020. In that same post I also asked whether it was already too late to invest into value stocks.
There is nothing worse as an investor than not backing a stock that you have a strong instinct will appreciate, and then having to watch from the side lines as it soars. Hindsight can be very punishing when you have to watch gains of more than 100% from stocks that you were not quite contrarian enough to punt at what turned out to be their low.
So, when you see a stock that hasn’t really bounced back, you have to ask yourself whether it might be a late opportunity to be brave and make a contrarian investment play? That is exactly how I currently feel about Hammerson (LSE:HMSO) and Costain Group (LSE:COST). Both stocks are currently trading at a tiny fraction of the price that they were back in 2018, and I cannot decide whether they are a contrarian opportunity – or a total folly.
It doesn’t help that when looking at these stocks I am presented with a dilemma. Clearly their depressed stock prices are not merely the consequence of stock market malaise, but a reflection of real underlying problems within each company. The question is whether the markets have ‘over punished’ these stocks to such a low base that they now offer a big upside opportunity, even if their prices may never fully recover to their levels of 2018.
Moreover, my expertise are as a technology investor backing forward-leaning companies and ventures, and as a real estate investor focused on technology clusters. To understand the prospects of shopping centres (Hammerson) or infrastructure solutions (Costain) would require a deep dive. So my instinct in these circumstances is that an investment is best avoided… but what if two years from now these stocks did return to their 2018 levels?
Hammerson is the easier of the two to get to grips with. The company just posted the biggest loss in its history (£1.7 billion) and, as the owner of a huge portfolio of retail properties and shopping malls, most likely now finds itself on the wrong side of history. During 2020 its rent collection dropped to 76% and occupancy fell from 97.2% to 94.3%.
Yet during 2020 Hammerson was able to successfully execute a £800m rights issue to shore up its position, and on 12th March its Board proposed re-establishing its dividend. The share price initially climbed – albeit from a very low base – upon this announcement, but investor sentiment then quickly cooled again, and the price is currently at 32.78p. There is 33% of upside if Hammerson were to return to its 52-week high of 43.50p, and an astonishing 681% of upside if the stock were to return to its price of exactly three years ago. The latter won’t happen, but an appreciation to somewhere between these values is not unthinkable.
The trend away from physical shopping and stores will continue even after the restrictions of the pandemic come to an end. Yet there is also a lot of pent-up demand and savings amongst consumers who are desperate for a sense of ‘normality’. After a year of being unable to visit physical stores, there may well be a retail revival when restrictions are lifted.
Costain Group is a different story. In September my Motley Fool colleague Thomas Carr asked whether a crash in the stock price meant that it was time to buy Costain. Investors who decided that the answer to the question was ‘yes’ will now be sitting on 50% gains. There is still 75% of further upside if the Costain stock price returns to its 52-week high, and 666% of upside if the stock can recover to its price of exactly three years ago. In that respect the potential variance in the share price is not unlike that of Hammerson.
However, even though Costain is sitting on an order book of £4.2 billion, its operating margins are wafer thin, even in good times. In March it had to execute a £100m rights issue to shore up its balance sheet and the company has shown how losing money on just two projects undermined the profitability (and value) of the entire company, as it swung from a modest £6.6m profit on a £1.15 billion turnover in 2019 to a £96m loss in 2020.
Whilst Hammerson’s future prospects can largely be correlated with an objective and observable external trend – the return of shoppers to malls and with them new occupants for retail units – Costain has tied its future prospects to a highly subjective ability to “transform” itself and “improve its approach to contract selection”. And that is where I jump off from my contrarian investment fantasy when it comes to Costain. I’m just not interested in aligning my investments with the execution of ‘organisational change’. But I am sorely tempted to make a contrarian investment into Hammerson.
