Hindsight makes the process of investing look easy. But it really isn’t. And that’s particularly true when taking a contrarian view and investing in stocks that have been falling. One example is the behaviour of the BT (LSE: BT.A) share price.
The BT share price had been falling for a long time
The best time to buy was last Autumn because the stock was near its lows. The problem at the time is, we didn’t know it. And it’s hard to buy a stock that’s been trending down for years even when the fundamentals make the business look cheap. BT shares began their slide at the end of 2015. So that downtrend was five years old. It takes a stout contrarian heart to fight natural emotions and buy a share like that.
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But we don’t have to. There’s no shame in waiting for a trend to break before becoming interested in a stock. And the company handbrake-turned and shot higher in early November last year. BT released an upbeat half-year results report just days before the share price jumped up. And my guess is the positive Covid-19 vaccination news around the time also helped investors to reassess BT’s forward prospects.
The update confirmed that turnaround strategies were beginning to bear fruit. BT reported a “strong” operational performance despite the pandemic. And the directors declared their intention to restart shareholder dividends in 2021 because of growth in earnings before interest, tax, depreciation and amortisation (EBITDA).
And rising earnings is something new. We’ve become used to a four-year table of red ink when it comes to growth in earnings per share. But City analysts have pencilled in a mid-single-digit percentage advance for the trading year to March 2022. And I think that could mark the green shoots of change and better operational times ahead for the business.
There could be operational gains ahead
After all, BT pointed out in its October report that the pandemic has underlined the crucial role played by communication technology and services in our lives. And from that philosophical point of view, BT occupies a decent niche in the market and it always has done. However, what’s been unclear over the past few years is whether or not the company had the ongoing ability to turn its privileged position into growing profits.
And, in fairness, that point remains unproven even though there’s a modest earnings increase forecast ahead. But those are the risks we face when investing in turnaround situations. We must be contrarian. If we wait until we know for sure that growth is back on track, the best of the investment opportunity will have passed us by.
So I’d consider running the calculator over BT shares right now. It looks cheap by some conventional valuation measures. For example, with the share price near 148p, the forward-looking earnings multiple for the trading year to March 2022 is just over seven. And the price-to-book rating runs around 1.2.
However, BT isn’t a no-brainer. It runs a capital-intensive business and the debts are high. Constant reinvestment is required to keep the firm in the game. But my guess is the company has arrested its operational decline and can now build on its gains. I’d expect BT’s share price to reflect further progress as it arrives in the years ahead.