Shares in Allied Minds (LSE: ALM), Tullow Oil (LSE: TLW) and Restaurant Group (LSE: RTN) have all moved by about 30% over the last month.
In this article I’ll explain why these big moves took place, and whether I think the stocks deserve a buy rating.
Market struggling to value this firm
Shares in technology incubator Allied Minds have risen by 36% over the last month, but are still worth around 35% less than they were one year ago.
Star fund manager Neil Woodford is a major investor in Allied through his Patient Capital Trust fund. Back in January, Mr Woodford said in a blog post that “the market appears to be struggling to place an appropriate value on this young technology business”.
Allied hopes that its portfolio of investments in small US technology and science businesses will yield some major success stories.
Yet to some extent, this potential is already priced into Allied’s shares. The group has a market cap of £977m, despite having generated cumulative losses of $179m since 2011. Total revenue over that period has been less than $20m and the shares trade at almost six times their book value.
Although Allied could be a huge hit, I’d argue that this stock is impossible for most investors to analyse or value. It’s not a stock I’d buy.
A quality business but a risky stock?
Tullow Oil is a simple business to understand. It drills holes in the ground and pumps oil out of them. Tullow stock has climbed 29% over the last month, as oil prices have stabilised and sentiment has improved towards the sector.
However, I believe this shift in sentiment could be premature. This week’s US government figures show that US oil stocks are 14% higher than they were one year ago. The latest figures from the International Energy Agency suggest that at the end of 2015, global oil production was 2m barrels per day higher than global demand.
In my view, a further slide in oil prices is quite likely before the market begins to rebalance. My concern is that Tullow’s $4bn net debt may force the group to raise fresh funds from shareholders at some point. I don’t see the point in taking this risk.
A tasty bargain?
One of the biggest fallers in March is Restaurant Group, which owns chains including Frankie &Â Benny’s. In its 2015 results, the firm said that like-for-like sales had fallen by 1.5% during the first 10 weeks of 2016 and warned of “challenging trading conditions”.
This warning followed a January update in which management said they were “more cautious than previously on the outlook for 2016”. These two statements both stopped short of being full-blown profit warnings. However, it’s clear that uncertain demand and rising wage costs are expected to hit profits this year.
Restaurant Group shares have fallen by 42% in 2016. The stock now trades on a forecast P/E of 11 and offers a potential yield of 4.6%.
These shares may be approaching value territory, but profit warnings often come in threes. Analysts have slashed their earnings forecasts for the firm since January. I wouldn’t be surprised if we received more bad news from Restaurant Group later this year. I’m going to wait a little longer before deciding whether to buy.