As I’m sure you’ve heard enough times by now, 2015 wasn’t a good year for some investors. The FTSE 100 fell by around 300 points, or nearly 5% over the year, though clearly the direction of travel wasn’t in a straight line by any stretch of the imagination.
Indeed, the blue-chip index soared to over 7,000 points in April and May, only to crash to sub-6,000 points in September and December during the volatility that characterised the second half of the year.
Dogs of war
And along with this volatility there was no shortage of stock-specific bad news.
Shareholders in Tullow Oil (LSE: TLW) were heading for the exit on concerns about the steady decline of the price of oil and the mounting debt pile. As the chart shows, the shares have been punished and seem to be stuck in a never-ending downtrend.
Home Retail (LSE: HOME), most famous for the Argos chain of UK-based home and general merchandise stores, hasn’t been far behind either. Why? Investors fretted that the full-year results, which management made clear depended on a profitable Christmas trading period, may not have been enough to meet already-lowered market expectations.
Joining the others in the doghouse was Amec Foster Wheeler (LSE: AMFW), the international oil, gas and mining equipment services business. The shares had broadly tracked the benchmark for most of 2015. Then management updated the market with a less-than-optimistic trading update in November in addition to a 50% cut in the ordinary dividend going forward.
Will 2016 be a turning point?
Most investors who listen to their behavioural bias will quite possibly flock to these stocks – as every bargain hunter loves… well, a bargain. However, experience has taught me that trading can often get worse before it gets better.
By way of an example, Tullow is obviously heavily exposed to the oil price. Owing to the fact that my crystal ball is broken, I wouldn’t like to be the one to call a bottom to the price. I have read, and indeed written, about the possibility that it could go as low as $10 per barrel. However, once the current demand begins to outstrip supply we should see the price of the black stuff rise. This should see the stronger players in the sector snap up quality assets on the cheap, and emerge from the volatility in far better shape than they began.
This will be the case with Amec Foster Wheeler, though I suspect the companies that are served will need to see commodity prices stabilise first before allocating capital to new projects.
I believe that management has done the right thing by managing investors’ expectations, accelerating cost controls and cutting the ordinary dividend by 50%, and by exiting markets that don’t offer acceptable returns.
Even now with the dividend cut priced-in, the shares trade on a forward price-to-earnings ratio of just over 7 times earnings and are expected to yield over 5%. It looks to me as though the market is expecting things to get worse before they get better, but for me the shares are starting to become interesting.
Home Retail is an interesting one and despite its disappointing trading, it looks an attractive bid target. Indeed there have been reports that a bid may well be forthcoming with the shares hitting lows not seen since 2012.
Though one shouldn’t buy shares just on the hope of a takeover, they currently look cheap across a range of metrics: A sub-10 times forecast earnings, a price-to-book of 0.31 and a price-to-tangible-book value of less than one give you a decent margin of safety should a bid not come to pass.