The performance of the S&P/ASX200 (ASX: XJO) (Index:^AXJO) might have been disappointing for the year so far, but there are a number of popular stocks that have performed far worse.
It is often tempting for investors to consider these beaten down stocks in the hope of a quick turnaround – but this rarely occurs. It usually takes years for the share price to recover and during that time far better investments have passed by.
With that in mind, there is always the chance for a rebound in the share price if the long term fundamentals remain true. Investors need to determine whether the market has over-reacted to short-term bad news or whether the underlying business case has fundamentally changed.
Here are four stocks that have been beaten down heavily over recent months (some of which I still own) and my view of whether they offer good value, or rather, are a value trap:
1. Cash Converters International Ltd (ASX: CCV) – As a long term holder of Cash Converters I would have to say the past nine months have been truly disappointing. The share price has fallen by more than 55% and the company stopped paying a dividend. In addition to this, the company was served with a new class action settlement, its UK operations have been underperforming and its banking facilities with Westpac were also terminated! Although the company is likely to produce underlying profit growth in the year ahead and the shares appear relatively cheap, there remains a great deal of uncertainty regarding the payday lending industry as a whole. Therefore, investors may be best served by putting Cash Converters in the "too hard" basket until the future outlook is clearer.
2. Capitol Health Ltd (ASX: CAJ) – I have been a strong supporter of Capital Health over the last few months but the manner in which it delivered a recent profit downgrade was somewhat disturbing. Since reaching its all-time high in April, the share price has fallen by more than 65% and is now trading on a price-to-earnings ratio of just 14 with a dividend yield of 3.5%. Despite the disappointing profit warning, I believe the market has over-reacted to short-term negative news and the lack of short-term earnings visibility. The long-term underlying business case for Capitol Health is still intact. Investors who are willing to remain patient should see the recent fall as a buying opportunity.
3. Dick Smith Holdings Ltd (ASX: DSH) – Dick Smith released its profit downgrade on the same day as Capitol Health and both stocks were smashed on the day. The stock is also down 65% from its yearly high and the company faces a critical sales period during the Christmas season. Management has admitted it is facing a number of challenges in the current fierce retail environment and there could be further pressure on its operating margins. For these reasons, investors may choose to wait until the company releases its next sales update before taking a stake in the company. The shares appear very cheap, trading at only 5x earnings, but there could be more downside if the company produces another disappointing update.
4. MMA Offshore Ltd (ASX: MRM) – MMA's share price has lost more than 85% over the past 12 months and more than 33% since the company provided a trading update just yesterday. The maritime services company is facing a very difficult period as a result of the lower oil price reducing the demand for the services it provides. Tender activity for new projects is extremely fierce and its current vessel utilisation rate is well below its historical levels. Although the shares trade at a significant discount to its net tangible assets, the lack of earnings visibility means the shares are unlikely to recover significantly in the short to medium term. Until there is a meaningful recovery in the oil price, investors should give MMA a wide berth.
