Although many investors would have been disappointed with the overall returns generated by the market in 2015, there is little doubt that it has been an interesting year. There was an unusually high level of volatility in the market and this generated wild share price movements in both directions. There were also a number of beaten-down shares that made remarkable share price recoveries in 2015. For example many investors would have not predicted the rebound in the share prices of Metcash Limited (ASX: MTS), Qantas Airways Limited (ASX: QAN) and Pacific Brands Limited (ASX: PBG), all of which bounced significantly since hitting their…
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Although many investors would have been disappointed with the overall returns generated by the market in 2015, there is little doubt that it has been an interesting year. There was an unusually high level of volatility in the market and this generated wild share price movements in both directions.
There were also a number of beaten-down shares that made remarkable share price recoveries in 2015. For example many investors would have not predicted the rebound in the share prices of Metcash Limited (ASX: MTS), Qantas Airways Limited (ASX: QAN) and Pacific Brands Limited (ASX: PBG), all of which bounced significantly since hitting their respective lows. The examples above demonstrate that it is possible for beaten-down companies to make share price recoveries, but that doesn’t necessarily mean they will be great long term investments.
For the contrarian investor out there, 2015 appears to have created a plethora of opportunities to go against the crowd in 2016. Three of these opportunities include:
1. Cash Converters International Ltd (ASX: CCV) – 2015 has been a year to forget for shareholders of Cash Converters with the share price falling more than 52% from its yearly high of $1.11. A number of issues have plagued the company including class actions, uncertainty regarding the ongoing government review of the pay-day lending sector, the withdrawal of financing by Westpac Banking Corp (ASX: WBC) and the difficult trading conditions being faced in the UK.
Shareholders may receive some respite once the government review is completed in February as this should remove the legislative uncertainty facing the sector. Investors will be banking on a favourable outcome, and at the very least, improved certainty moving forward.
If Cash Converters can quickly address its other short term challenges, there is no reason why the share price could not make a recovery in 2016 as the company is expected to deliver underlying earnings growth. Investors should note however, sentiment in the sector is very negative and even at the current share price, a high level of uncertainty means Cash Converters is a high risk investment.
2. Santos Ltd (ASX: STO) – The collapse of the oil price coupled with a highly dilutive capital raising has seen the share price of Santos fall by more than 54% over the past 12 months and significantly underperform its peers such as Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH).
Although the capital raising was a painful experience for shareholders, it has strengthened Santos’ balance sheet by reducing the company’s net debt by $3.5 billion and at the same time removed the uncertainty surrounding whether or not the company would have to raise capital. Santos is now in a stronger position to withstand a lower oil price albeit at the expense of shareholders.
Clearly, the oil price is now the key factor that will determine whether or not Santos’ share price will make a recovery in the short term. Investors (or speculators) who are looking for a high risk – high return investment and who believe the oil price can make a significant recovery in 2016 could consider Santos as a leveraged play in the energy sector.
3. Cabcharge Australia Limited (ASX: CAB) – 2015 was another tough year for the long suffering shareholders of Cabcharge, with the share price declining more than 37% over the past 12 months.
Although the company has long been the dominant player in the taxi industry, it is facing stiff competition by ‘disruptors’ like ride sharing service provider Uber. In addition to this, Cabcharge’s revenues are being negatively impacted by a halving of the taxi payments service fee which has been introduced through recent legislative changes. These issues are already impacting Cabcharge’s earnings with profits falling by more than 13% in FY15 and earnings are also expected to fall in FY16.
The shares are trading on a price-to-earnings ratio of less than 7, and although this appears ‘cheap’, the share price is likely to remain under pressure until the company can prove it can regain earnings momentum. Investors, therefore, should not expect a comeback in 2016 and may be better served by looking for other investment opportunities.
All three of the stocks mentioned could easily be put in the “too hard” basket so if you are looking for something a little easier with the potential for great returns, check out the link below…
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Motley Fool contributor Christopher Georges owns shares in Cash Converters. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.