Where is the value in the worst performing shares of the last six months?
I'm a bit of a sucker for a falling knife when I think the circumstances are right and the fall has been overdone.
We all know that catching falling knives can be a very dangerous game. Anyone who has tried to time a purchase to perfection will have had their fingers metaphorically sliced more than once. I know I have.
On the other hand, contrarian investing has much to be said for it -- and most of us like to think of ourselves as contrarian investors. Some of my best successes have been through bottom fishing.
So as a starting point for a little contrarian investing, I decided to have a look at the worst performing shares on the market from the last six months, which retain a listing.
At the time of writing, the top 30 class dunces in descending order (worst performers first with percentage falls shown) from the FTSE All-Share Index are:
Now if we widen the list to include the altogether more volatile AIM listed stocks, then we have a staggering 22 companies which register on the list, before we get to the worst of the All-Share stocks at Thomas Cook.
And you wonder why so many investors simply don't "do" AIM stocks!
The worst AIM fallers over the last half year, again in descending order, are:
What to look for
When looking for the value / recovery candidates, I think cash-flow and real assets are the two most important factors to look at as a starting point. It's a lack of cash that sends companies into administration and intangible assets aren't much use in a fire sale.
It's also worth wait until there's real evidence that a company has turned the corner before buying. You may miss the absolute bargain basement prices, but you should still get in on the long term recovery – and you're less likely to be faced with 100% wipe-outs.
Also – try to completely ignore the previous price of a share; only the value metrics today are relevant.
Falling knife buy candidates
From the above lists, I've personally averaged down on PV Crystalox Solar, Trinity Mirror, Lloyds Banking, Cable & Wireless Worldwide (admittedly breaking my own rules in the process!) and am sitting on an overall loss on all four.
My Foolish colleague Stuart Watson ran his slide rule over top of the fully-listed falling knives, Thomas Cook, a couple of weeks ago, concluding that "anyone tempted to do some bottom fishing should hang tight for the time being". Thomas Cook may well recover -- but there isn't enough in the way of tangible assets to tempt me in.
In June, I pondered whether Game Group would be the next HMV (LSE: HMV). I don't think it will quite go that far, but decided against buying the shares.
Since then, they've dropped a further 11.5p to just 28.5p at the time of writing. I'm thinking they may well be worth a punt at this price which is below their net tangible asset value, below the year end net cash figure, and none of the covering brokers anticipate losses either this year or next - but it still isn't what you'd call "safe" in today's retail marketplace.
I'll be having a closer look at all the above falling knife candidates over the coming weeks and will let you know if I think I've found any compelling value.
What do you think -- are there any strong buy candidates in the two lists above?
More from David Holding:
> David owns shares in PV Crystalox Solar, Trinity Mirror, Lloyds Banking Group, & Cable & Wireless Worldwide.