Buying unpopular companies when their share prices have been demolished is a time-honored strategy that can generate market-beating returns for the patient. Even so, I'm not keen on the following 3 beaten-up businesses. Here's why:
Brambles Limited (ASX: BXB)
Brambles has had a tough year, with shares diving 20% following a first quarter downgrade and weak first half. While sales have picked up somewhat in the 3rd quarter, the business remains under pressure from competition. Additionally, management recently withdrew their target of 20% Returns on Capital Invested (ROCI) by 2019, seemingly satisfied with today's levels of ~15.9% (or 14.8%, under their previous methodology). This suggests that the business itself is not capable of generating higher returns on its existing assets, and will only grow via expansion.
There is a price at which I'd buy Brambles shares, but $9.94 is not it.
Quintis Ltd (ASX: QIN)
Shares in sandalwood grower-turned pharmaceutical company Quintis, formerly TFS Corporation, have dived this year after short seller Glaucus Capital asserted that the company was a Ponzi-like scheme. The seriousness of these allegations was accentuated by the subsequent sudden departure of the managing director, Frank Wilson, who 'received an offer to potentially partner with an unnamed international corporation to present a proposed change of control transaction to the Company board.'
Foolish readers have seen this before with Surfstitch Group Ltd (ASX: SRF). Different company, different situation, but Mr Wilson's departure is still a big red flag in my opinion. It is also important to remember that Glaucus stands to profit from a decline in Quintis' shares, so they are incentivised to spook shareholders. Either way I would not feel comfortable touching this one without serious investigation.
Wellard Ltd (ASX: WLD)
Wellard is a live animal exporter and meat processing company that has been smashed by high cattle prices and restructuring, resulting in ballooning debt and weak cash flow. Management recently announced a $52 million capital raising, fortunately with shares to institutions issued at $0.24 each, above recent market prices. This will dilute existing owners significantly, given the company has a market capitalisation of $100 million or so at present. I think there is an opportunity to find value in Wellard, which had net tangible assets of $0.42 per share as at 31 December 2016 (pre- capital raising) and could prove very cheap if it is able to return to profitability and sustainable cash generation.
However, the company's net debt of $188 million is very high and the recent capital raising diluted the value of each share significantly, making them less valuable if the company returns to profitability. I'm interested, but think it is probably too risky for me.
