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.
|Cable & Wireless Communications (LSE: CWC)||33p||48%|
|Trinity Mirror (LSE: TNI)||39p||58%|
|Alumasc Group (LSE: ALU)||76p||58%|
|Immunodiagnostics Systems (LSE: IDH)||360p||70%|
|RSM Tenon (LSE: TNO)||7.2p||89%|
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%.
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.
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.
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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> The Motley Fool owns shares in Tesco.