Five Bombed-Out Bargains

Published in Investing on 13 March 2012

Digging among the fallen can often unearth some recovery prospects.

Bottom picking is a share selection technique that I don't often employ. If a share price has collapsed, it's usually for a very good reason -- people don't dump shares that they think are good.

But just as it's human nature to push booming shares to irrational overvaluations, the same effect can happen with falling ones, and they can be punished beyond what they deserve. With that in mind, I've been examining some shares that have fallen badly over the past few months, and I've found a few that I think would bear closer examination.

CompanyPriceRecent fall
Cable & Wireless Communications (LSE: CWC)33p48%
Trinity Mirror (LSE: TNI)39p58%
Alumasc Group (LSE: ALU)76p58%
Immunodiagnostics Systems (LSE: IDH)360p70%
RSM Tenon (LSE: TNO)7.2p89%

Trinity Mirror

The publisher of The Mirror and The People has suffered the way other print media outlets have in recent years, with increasing numbers of people turning to online sources and ditching the dead tree approach -- I can't remember when I actually last bought a printed newspaper myself.

Profits, along with the share price, crashed, and dividend payments were suspended. But with a belated move towards online news, Trinity Mirror may well have turned the corner. While full-year profits for December 2011 and 2012 will be still way down on pre-trouble times, there's a dividend expected again for 2012. And though it'll only be a fraction of pre-suspension payouts, forecasts suggest around 9%.

Immunodiagnostics Systems

The recent history of Immunodiagnostics Systems is a classic example of what happens when the wheels come off a growth share bandwagon. While earnings growth of 30%, 40%, 50% a year was happening, the price/earnings-to-growth ratio was quite low and a high price-to-earnings (P/E) ratio was sustained.

Then came a profit warning, high-growth predictions were scaled back and the share price crashed by 70%. But current forecasts, even after having been revised downwards, put the shares on a P/E of 8.6 for March 2012 and 7.9 for 2013.

Readjusting to a new valuation model, the shares could well be nicely placed for a decent recovery. There's risk, but it's too early to write it off yet.

Alumasc

This building and engineering supply company hit the skids when it reported a bad second half for 2011 and announced a severe dividend cut, and the share price tanked in response. As my colleague Roland Head pointed out last month, the failure to see it coming, coupled with several years of paying out too much in dividends, added up to serious management failures.

So, several whammies hit the shares at the same time. But now that a couple of management heads have rolled and forecasts have been appropriately downgraded, the much smaller expected dividends still suggest a yield of 4.3% for 2012 and 4.6% for 2013. And if the good-looking earnings recovery for 2013 comes off, we'll be looking at a forward P/E of only 7.5.

RSM Tenon

In addition to bottom picking, we're looking at a penny share here, too, which would set a lot of Fools' alarm bells ringing. But it's only a few months ago that RSM Tenon was valued at more than eight times what investors think it's worth today.

After a fearful AGM statement, the company went on to report a half-year loss in February, with some of its figures having to be adjusted for errors in its previous year's accounts.

But there are restructuring plans and a new boss at the helm, and the share price looks like it might be starting to perk up a little. It's high risk, but the latest forecasts (after the half-year results) suggest a P/E for the full year of under 3.

Cable & Wireless Communications

Do I think Cable & Wireless Communications is a great company that's just misunderstood? No, it's performed pretty poorly, as fellow Fool Cliff D'Arcy opined last month. The low price is partly due to expectations of a dividend cut, which is almost certainly going to happen. But even if it's cut by half, it will still offer a decent yield, and forecasts suggest the recent fall in earnings per share is bottoming out.

Debts have built up, but we might well be looking at a turnaround point -- and there's always the possibility of a takeover bid.

Rush out and buy?

Should we fill our boots with these shares? Well, no. But if we're interested in recovery investing and looking for oversold shares, this quick look might give us some ideas for further research. And while I'm unlikely to be buying any of these (my risk tolerance is a lot lower these days), I'll be watching them with interest.

Oh, and don't forget Tesco (LSE: TSCO), whose share price has lost around 25% since Christmas.

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Comments

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Harry34 13 Mar 2012 , 5:15pm

Why do you think Trinity Mirror will reintroduce the dividend? The board made clear at the interim report that they would only do that a) once advertising revenues recovered and b) once the general UK economy picked up. Neither has happened so a return of the dividend is surely unlikely. Mind you if they post profits at around the £90 million then they would be in a position to pay one, and that might be the (only?) thing that helps the share price pick up. Other factors to watch will be how much net debt has fallen. Hopefully they used the extra revenue from the six months or so between the closure of the NOTW and the start of the SoS sensibly. I am a holder at 48p per share

theRealGrinch 13 Mar 2012 , 8:05pm

looks like you will have more luck backing outsiders at Cheltenham

UncleEbenezer 13 Mar 2012 , 9:45pm

You forgot to mention the company currently topping the NFSC league.

ANuvver 13 Mar 2012 , 10:52pm

It saddens me to say it, since I've spent more than 20 years in the industry, but print media has been commercially dead for years.

Rather than hope for a miraculous turnaround from one of the big groups, a better play for the investor with ice-water in their veins would be to wait for them to really give up the ghost and then buy in, hoping for a takeover from one of the brand-hungry online goliaths. This would require not only nerves of steel but insanely good timing. Personally, I don't buy shares on the sole premise that I'll "bag" on a takeover, but horses for courses...

Case in point, and I know it's not publicly traded, but I would give the Guardian about 2 years before it becomes little more than a trophy badge on Google News.

UncleEbenezer 14 Mar 2012 , 1:23am

Print media are alive and well, as part of a wider strategy. As witness PSON in my portfolio.

Mike10613 14 Mar 2012 , 11:28am

It can be worth buying loss making companies. I bought Premier Foods at 4p and they are 11.75p at the time of writing. Don't bet your shirt though! :) The likes of Thomas Cook and HMV could come back too.

TMFBoing 14 Mar 2012 , 11:58am

Re Trinity Mirror...

I was going on current analysts' forecasts for dividends. But a closer look shows there is actually only one post-interim forecast of a dividend for 2011, with several later ones predicting nothing. So that can probably be discounted - I'll ask for the article to be changed.

But there are four post-interim forecasts of between 3p and 4p per share for 2012, which average out at approximately 9%.

Foolish best,
Alan
TMFBoing

BrnzDrgn 14 Mar 2012 , 2:24pm

I would not buy into newspapers, I bought Independant News Media to use up a spare £400 as it holds foreign papers and all it did was fall lower. The answer is that the old model is out of date, if your paper isn't free advertised revenue and in Cities or on the internet and using advertising revenue then it probably isn;t worth bothering.

MrBearBull888 14 Mar 2012 , 2:42pm


I dont like RSM Tenon. It is an accounting firm that could not get its own figures correct. Indeed it sounds more serious than just an error or two which we can all make.

sonofwan 14 Mar 2012 , 3:02pm

No mention of CW buy-out prospects by Vodafone and Tata.. Odd.

CunningCliff 15 Mar 2012 , 1:41pm

sonofwan: "No mention of CW buy-out prospects by Vodafone and Tata. Odd."

That's because Alan wrote about C&W Communications, whereas it is C&W Worldwide which is being bid for, see:

http://www.fool.co.uk/news/investing/company-comment/2012/02/16/cable-wireless-worldwide-concentrates-on-cash.aspx

It's an easy mistake to make!

Cliff

CunningCliff 15 Mar 2012 , 1:48pm

In my view, Trinity Mirror is a dog with too many fleas.

1) Net debt of over £221 million dwarfs the company's market value of £95 million.

2) It relies too heavily on print media, an industry in long-term decline. Fifteen years ago, I would buy 14 newspapers a week. Today, I buy one, the Weekend FT.

3) Sly Bailey is perhaps the most overpaid CEO on the LSE's main market. Last year, she was paid £1.47 million, plus pension contributions of £248,000, to run a small-cap company!

See:
http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/media/9136983/Investor-unrest-at-Trinity-Mirror-CEOs-pay.html

4) TNI's share price has fallen 90% from its peak, but it can still fall another 90%, or even 100%.

Caveat emptor! ;0)

Cliff

CunningCliff 15 Mar 2012 , 1:52pm

Correction: TNI's share price hit 765p in March 2000, so it has fallen 95% in 12 years. Nice work, Sly Bailey!!!

Cliff

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