Who doesn’t love a comeback kid? Many investors back stock market losers in the hope of picking it up at a bargain price just before it begins its fightback.
Lately, bargain hunters have been busily backing construction and services company Kier Group (LSE:KIE), one of Neil Woodford’s most notorious stock picks (and boy did he have a few). At one point, the heavily shorted stock looked set to go the same way as other high-profile outsourcing specialists, the now defunct Carillion and Interserve. It’s still standing though, and the Kier share price trades at shockingly low levels.
Just three years ago, the group’s stock stood proud at around 1,400p, only to lose more more than 95% of its value as it fell to a low of around 60p last summer. It has picked up slightly to trade at around 13op today, after climbing an impressive 60% in the last month, rewarding risk takers who got their timing right.
High rewards, high risks
As ever, there’s no guarantee the Kier share price will repeat this outperformance. Anybody who buys it today must brace themselves for serious volatility in the weeks and months ahead. Are you up for that?
Kier was caught by the Carillion fallout, which made banks reluctant to lend. That forced management into emergency mode, including a widely-snubbed £264m fundraising in December 2018. The company slumped to a pre-tax loss of £245m last year, down from a profit of £106m the year before, while debts rose alarmingly.
After a management clear out, new CEO Andrew Davies has fast-tracked his turnaround plan, cutting jobs and suspending dividend payments. He’s also been offloading non-core operations, such as homebuilding business Kier Living, cutting jobs, and seeking £60m of cost savings. Debt remains a major worry and will for some time.
The leaner company now aims to focus on infrastructure, regional construction, utilities and road maintenance. It boasts a decent order book, including high-profile contracts for multi-billion pound construction projects, notably Hinkley Point C, Crossrail and HS2, and continues to win new contracts. So would I buy it?
Kier we go?
My experience of companies in recovery is that the fightback is typically longer and harder than you think. You get that early share price spike, a kind of mini relief rally as the danger of total collapse is averted. But then the hard work begins. Kier Group is at the start of that phase.
Its success partly depends on the UK economy. Some have cited Brexit as a worry, but that may be a headwind, with new chancellor Rishi Sunak under pressure to greenlight an infrastructure splurge, while HS2 has been approved.
Kier Group stock is dirt cheap, trading at just 2.27 times earnings, which some will find hard to resist. It has a long road ahead. You should only invest if you’re prepared to be patient, and understand all the risks. On those terms, it could offer risk-seekers an exciting ride.