Sometimes a company’s shares can fall significantly on no news. Or on news that has absolutely nothing to do with how the business is performing. Let’s take a look at two of today’s big fallers and see if this is a great opportunity to buy a slice of these companies.
An entirely routine scenario
Shares of FTSE 250 firm DFS Furniture (LSE: DFS) tumbled 10% when the market opened this morning. This followed news that major shareholder Advent International had halved its stake in the company.
Advent is a big US private equity firm. It bought DFS in 2010 and floated it on the stock market in March 2015. It’s post-float stake in the company was 53.2% and it’s been selling it down ever since: to 38.2% in October 2015, to 24.1% in April this year and to 12.1% with its latest sale.
We’re simply seeing a private equity group doing what private equity groups do. Moving capital out of a mature investment for recycling into new opportunities. It’s an entirely routine scenario. The latest sale was by a placing to institutional investors at 240p a share and the shares are trading at 235p as I’m writing.
With Advent now close to exiting its position, is this a great time to buy? Well, last month DFS posted record results for its financial year ended 30 July and added that trading in the 14 weeks since the Brexit referendum had “not indicated any weakening of demand.”
The company acknowledges that 2017 could be a tougher year but reckons it’s well positioned to “mitigate” economic headwinds thanks to its “resilient” business model. If so, it could indeed prove good value today on a trailing price-to-earnings (P/E) ratio of 9.9 and dividend yield of 4.7%.
Generous dividends
Shares of City of London Investment Group (LSE: CLIG) opened this morning unchanged from yesterday’s closing price of 370p. Then, at around 09:15, the price suddenly dived, falling as low as 335p (down 9.5%). The FTSE SmallCap company has released no news and I can’t find anything else to explain the drop.
This fund management business specialises in emerging markets. Major shareholders include notable small-cap backers Hargreave Hale and Slater Investments, and the company has a good record of delivering value, particularly via generous dividends.
For its latest financial year ended 30 June, the company paid a dividend of 24p, giving a yield of 6.7% at a share price that has recovered to 360p this afternoon. The dividend was uncovered by earnings of 23.3p (P/E 15.5), but the board said: “The much improved outlook, noting in particular the beneficial effect on our profits illustrated in our FX Matrix of the post-BREXIT decline in the value of sterling, together with the group’s strong cash position, fully justify this payment.”
With its generous dividends, and a P/E set to fall to 11.2 on that much improved outlook that management mentioned, this niche company could have a place in a diversified portfolio.