When I looked at Thomas Cook Group (LSE: TCG) a few weeks ago, the details of Chinese rescuer Fosun’s bailout package had just been revealed after months of uncertainty. The holiday firm was set to get a cash injection of £900m, half from Fosun and half from lenders.
The share price crashed to 6p, as existing shareholders had been, by that time, almost completely diluted out of their ownership of the company.Â
I still thought you’d be mad to buy at 6p, even though there was plenty of talk going round about getting in at the bottom and making big profits from a recovery.
Recovery risks
I’m always wary of buying a troubled stock for recovery at the best of times, even if it’s a quality company experiencing short-term tribulations. The big problem is that when potential investors try to call the bottom, in my experience they’re almost always premature — often by a considerable margin.
So when I look at a recovery proposition these days, I won’t buy until I’m confident that I’ve seen the recovery actually happening and the firm’s financial fortunes genuinely starting to turn around. What that approach guarantees is that I’ll miss the bottom, and if I do buy I’ll be doing so at a higher price than those who were braver then me and put their cash behind their speculations that much earlier.
But that’s fine, and a potentially smaller profit is a price I’m happy to pay to offset the risk of getting it wrong and losing money — and perhaps even avoiding a total wipeout.
Big trouble
With a company in severe financial distress, like Thomas Cook, my rule is even simpler — I won’t touch it with a bargepole. Even when the shares had slumped to 6p, I still feared they could fall a lot further. And, unfortunately, Friday’s news has proved me right — in one of those cases where I’d love my investment opinion to be wrong.
Thomas Cook is now desperately trying to find another £200m, as creditor banks (including Lloyds and RBS) say it needs the extra financial boost as a contingency against any extra funding the firm might need to get it through the winter.
The share price had already fallen further from that previous 6p level, and it dropped to 3.7p on Friday. Had you thought we really had seen the bottom when the Fosun package was unveiled and filled your boots, you’d be down 38%. And to get the full scale of that, anyone who bought Thomas Cook shares two years ago will be sitting on a 97% loss today.
Finally, buy?
But let’s ask the same question again — have Thomas Cook shares finally fallen as low as they’re going to, and is it now, at last, time to load up?
Here’s the problem. While unnamed sources have been quoted by news organisations as saying a deal could be reached, time is running out. The next 24 hours could well be crucial, and if you’re thinking of getting on to your broker on Monday morning to buy some shares, you could be too late — it looks like there’s a chance Thomas Cook could be in administration by then.