For contrarian investors, this year will have thrown up many possible recovery shares, those that have fallen heavily but could bounce back strongly in any market upturn. As always though, sorting the wheat from the chaff remains a key part of making this style of investing work. To make serious money from a recovery requires patience and skill.
Desperately raising more cash
Rolls-Royce (LSE: RR) has had a year to forget. It wasn’t firing on all cylinders even before the pandemic. There were problems with its Trent 1000 engines which were piling up costs for the engineer. Now with planes barely flying, revenues have plummeted – just like the share price.
This has forced Rolls-Royce to ask investors for more money. Just recently, it has had to raise £5bn. This money will dilute shareholders who’ve already lost much of the value of their shareholdings.
My take is that investing in Rolls-Royce at the moment is a gamble. The shares are likely to fall further before any recovery (if one happens) takes hold. I think it may be too risky, even for contrarian investors.
Cheap, but not a great recovery share for me
SSP Group (LSE: SSPG) has also been hammered by Covid-19. The group, which owns food kiosks in transport hubs, has been hit by low use of public transport and therefore low footfall past its premises.
Only last month the firm was warning of “considerable” job losses. Its second-half sales fell by 86%, showing just how reliant it is on travel for sales. The group has taken measures to reduce the cash it uses up, which is sensible. Even so, cash burn is still going to be around £250m-£270m every six months.
Unfortunately, in its last annual report, it only had £233.3m of cash on the balance sheet. Debts well exceeded this, including its short term liabilities – those needing to be paid by this September. So the balance sheet doesn’t strike me as being very robust.
Any road to a recovery feels like it will be a long one. The results, I think, make that clear.
This company feels like it will face an ongoing hit from the lack of commuters. Working from home may have permanently damaged the business model. As such, although the shares appear cheap, I’d avoid them.
Another potential recovery share I’ll avoid
Intercontinental Consolidated Airlines (LSE: IAG) is the last share I’ll look at. As the owner of British Airways and other airlines, its shares have fallen because of Covid-19.
This meant it has had to launch a steeply discounted €2.75bn rights issue, something other struggling companies are having to do as well.
Bookings remain well down as travellers opt to stay at home this year or go on a staycation. Bookings across the group have only recovered to about 30% of pre-pandemic levels. The recovery looks some way off with predictions that it will take years for the industry to get back to capacity.
I think it will be a long time before any of these three ‘recovery’ shares can deliver for investors. They may appear cheap now but I’d avoid them.
The post These stocks have had a bad year to date. Could they be profitable recovery shares? appeared first on The Motley Fool UK.
Andy Ross owns no share mentioned. The Motley Fool UK has recommended SSP Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020