When I first started investing I made the repeated mistake of charging into bombed-out stocks on the assumption that because they were cheaper, they were better value.
I thought I was being contrarian, but I was being naive.
I bought BP (LSE: BP) while clean-up workers were still hosing down seabirds and the share price still had a long way to fall.
I made similar mistakes with Barclays (LSE: BARC) (NYSE: BCS.US) and Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), buying on bad news, only for worse to follow.
All three stocks have taught me one hard lesson: when a company’s share price collapses, the aftershocks can rumble on for years.
BP: The Pain Isn’t Over Yet
After the Gulf oil spill in April 2010, analysts forecast that BP faced a shocking $23bn loss.
The figure is now twice that sum, and rising. Some say they could total $90bn, which puts my own losses in the shade.
Nearly five years later, BP’s share price is 441p, one-third lower than the pre-Deepwater peak of 653p. Other factors have played a part, notably the oil price collapse, but it all started in Mexico.
Barclays: Still Bad?
Barclays’ share price peaked in February 2007 when the phrase credit crunch was unknown, and investors thought the stock looked fair value at 721p.
Eight years later it trades at 240p, one-third of its all-time high, as the aftershocks of the financial crisis rumble on and on.
Politicians and regulators have inflicted slow revenge on the banks. Tougher regulation, fraud investigations, fine inflation, competition enquiries, mis-selling and bank bonus scandals, all flowed from the original disaster.
As the aftershocks finally die down, it’s hard to know how much of the investment case is still standing.
Tesco: More Shocks To Come?
When Tesco issued its first profit warning in January 2012, the stock traded at 405p. I bought shortly afterwards, only to see the price slide to a low of 170p as more warnings followed
Fluffed global expansion, exiting chief executives, accounting scandals, vanishing customers, the rise of German discounters, all were pre-figured in that first set off shock results.
When disaster strikes, it is usually a sign of something fundamentally wrong with the business, which can’t be put right in a matter of months.
If you’re tempted to buy Tesco on signs of recovery today, watch out: history suggests they may be more shocks ahead…