Top Shares For Bottom Fishers

Published in Investing on 22 July 2011

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:

CompanyLoss
Thomas Cook Group (LSE: TCG)65%
PV Crystalox Solar (LSE: PVCS)57.5%
Game Group (LSE: GMG)56%
RSM Tenon (LSE: TNO)55%
Alterian (LSE: ALN)52%
CPP Group (LSE: CPP)50%
Trinity Mirror (LSE: TNI)49%
Mouchel Group (LSE: MCHL)47%
Heritage Oil (LSE: HOIL)46%
Wolfson Microelectronics (LSE: WLF)45.5%
Enterprise Inns (LSE: ETI)45%
Flybe (LSE: FLYB)43%
Yell Group (LSE: YELL)43%
Hansen Transmissions (LSE: HSN)40%
Pace (LSE: PIC)38.5%
888 Holdings (LSE: 888)38%
Namakwa Diamonds (LSE: NAD)38%
Topps Tiles (LSE: TPT)37.5%
Betfair (LSE: BET)36.5%
Lloyds Banking Group (LSE: LLOY)36%
Fiberweb (LSE: FWEB)36%
Home Retail Group (LSE: HOME)35.5%
Cable & Wireless Worldwide (LSE: CW)35%
Premier Farnell (LSE: PFL)35%
Wilmington (LSE: WIL)33%
bwin.party digital (LSE: BPTY)31.5%
Supergroup (LSE: SGP)31%
Keller (LSE: KLR)30.5%
TUI Travel (LSE: TT)30%
Essar Energy (LSE: ESSR)30%

Volatile AIM

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:

CompanyLoss
Leed Petroleum (LSE: LDP)99.5%
AssetCo (LSE: ASTO)98%
WYG (LSE: WYG)94.5%
Viridas (LSE: VIR)89.5%
MBL Group (LSE: MUBL)89.5%
Noventa (LSE: NVTA)87%
Oxus (LSE: OXS)83%
Sarantel (LSE: SLG)76%
Silence Therapeutics (LSE: SLN)74%
ACTA SpA (LSE: ACTA)74%
Expansys (LSE: XPS)74%
Davenham (LSE: DAV)72%
Managed Support Services (LSE: MSS)72%
3D Diagnostic Imaging (LSE: 3DD)71.5%
Maxima Holdings (LSE: MXM)71%
Weather Lottery (LSE: TWL)70.5%
Alexander David Securities (LSE: ADS)68.5%
Atlantic Coal (LSE: ATC)66.5%
Norseman Gold (LSE: NGL)66.5%
Ten Alps (LSE: TAL)66%
GMA Resources (LSE: GMA)65.5%
Bglobal (LSE: BGBL)65%

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.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

DIYIncome 22 Jul 2011 , 9:20am

David,

There is the germ of a brilliant idea here. If you can find the right criteria to select 'recoverers' from the losers you could be on to a cracking investment approach.

The problem is that the reporting of accounts will necessarily trail behind any recovery - but the historic accounts may still give some indications - as you suggest, with tangible assets and cash flow and possibly the size of the company.

Possibly it might be the market that gives a useful signal - possibly by the price fall stopping or even rising a little. Probably the strength of the company's business model is the key - but this is difficult to judge with standard indicators.

I'm holding onto CW, HOME, LLOY

UncleEbenezer 22 Jul 2011 , 12:10pm

That is indeed an interesting list. I see two current holdings (one showing a 20% profit, the other a much bigger loss), plus a few current or recently-dismissed watchlist entries.

More interestingly a big "wow, must investigate" surprise!

growingmyown 22 Jul 2011 , 12:25pm

Hello David

Be interested to know what criteria you and other readers use to spot a falling knife from a fallen angel?

Growing My Own

mcturra2000 22 Jul 2011 , 12:32pm

At the beginning of the year I had been very bearish on TCG. With apologies to current holders, it's gratifying to one's predictions play out. Sorry folks.

Poor returns on capital, thin margins, massive debt, and a never-ending stream of problems are what's doing it in. Maybe it'll come good, but it's a huge gamble.

I believe it was Peter Lynch who said that the biggest losses come from companies with flimsy balance sheets. These words are backed up by Whitney Tilson.

Best of luck to all holders; let's hope they can turn the corner. I think they're facing significant headwinds, though.

teecee90 22 Jul 2011 , 12:36pm

Your link to Home Retail Group should be HOME not HRG

timthegambler 22 Jul 2011 , 1:05pm

I've been watching Betfair fall for some while now. They have a fantastic business model, and offer better odds than the old bookmakers.

However, may well see if they fall a fair bit further before purchase

theRealGrinch 22 Jul 2011 , 3:07pm

Re PV Crystalox Solar and averaging down as Fat Boy Slim sang once, you have come along way baby. I held these shares for 2 years but sold earlier this year at 64p. The balance sheet and management is strong, but fears about the future continue. Maybe I will tuck it away again.

TMFTigger 22 Jul 2011 , 7:43pm

Thanks teecee90 - that's fixed now.

dogshares 25 Jul 2011 , 1:43pm

I question WYG (White young Green) loss of 94.5% when they diluted last month whereby shareholders were re-issud only 1 share for every 50 they owned. To put in perspective I bought them when they were FTSE shares for the equivalent of £29 per share compared with today's price of 62 pence. They were ruined through numerous poor acquisions by previou executive management. I think the current executive management have failed miserably resulting in downgrade to AIM and the shares crashing. This is one to avoid at all costs.

Broomtree54 25 Jul 2011 , 8:54pm

Oh this can be sooooo tempting but a lot of fun when done in balance. I learnt my lesson with the 'falling knife' idea with both Northern Rock and RBS but I now use a small part of my cash flow [from profits] to 'invest' in 'recovery' stocks. Taylor Wimpey was my great joy to date - bought and 4.5p, sold at 43p and have been back in and out a few times since - currently holding 4,000 @ 29% profit.

My heart break at the moment is CW & CWC [Down 30 & 52%] but I cannot believe they will not come back [I seem to remember thinking that about RBS].

Others in the mix are: Omega Insurance [possible takeover candidate] - Record [Long-term recovery play] - Falkland Island Holdings [bought after recent fall - good long-term oil play] and would you believe it RBS.....Yes I still dream of £5.00 + currently down 20%

DRS73 25 Jul 2011 , 10:48pm

Is it not just a case of reading the news to see what companies are doing next?

4spiel 26 Jul 2011 , 10:10am

What kind of future has RBS -with the amount of toxic debt there in Ireland 50 billion for a start ? It coud be said that like UBS it might one day recover but for some considerable time its a matter of opportunity cost -your money is doing nothing and better put somewhere else

SaludDineroYAmor 27 Jul 2011 , 4:13am

Most Fools approach this process by «doubling» down (averageing if that how it is spelled) on existing holdings. I am no exception and neither is David the author. He says he is breaking his own rules and the mathematics are implacable. If you put as much money into a stock that has lost half its value you still pay much more than today's price. Therefore I have a new rule of surveying the 52 week lows. Both CPP and HOIL on the list have improved by 25% since their low point. A first time buyer could sell already.

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