A plunging share price is both an opportunity and a threat: an opportunity to buy into the recovery, the threat of getting stuck in a value trap. So which arethese three stocks?
Royal mess
I hate to kick off on a negative note, but right now, Royal Bank of Scotland Group (LON: RBS) looks like a classic valuetrap. Its 10-year performance chart shows a share price that has pretty much flatlined since the financial crisis. Actually, flatlining is putting agloss on things. Itsshare price managed to fall another 43% over the last 12 months, and currently trades at 176p.
German banking disasters are throwing an uncomfortable spotlight on the sector once again, but RBS should avoidschadenfreude. Like Deutsche, its also coughing up to US regulators, paying $1.1bn to settle lawsuits over claims it sold toxic mortgage securities to two American credit unions, withanother20in the pipeline. It still has admirers, Jefferies calls it a hold with a 200p target price, but it continues to post losses (695m in Q2), the Williams & Glyn disposal is dragging on, falling interest rates are squeezing bank margins and Brexit uncertainty rages. Avoid the trap, even at todaysapparently tempting valuation of six times earnings.
Rio with brio
Mining giant Rio Tinto (LSE: RIO) has rewarded contrarians this year, in stark contrast to RBS. Todays 2525p share price is up 60% from the low of 1577p it minedin mid-January. This years commodity stock rebound has been a wonder to behold, lifting all boats. Buying good companies amid a market sell-off is a strategywe applaud at the Fool andcertainly workedin this case (although as RBS shows, it isnt foolproof).
Rio chief executive Jean-Sebastien Jacques reckons metals are set to emerge from their twilight zone, with copper leading the way, as Chinese demand recovers. He reflectsa growing feeling that weve seen the bottom for commodity prices, and possibly China as well, although I remainconcernedabout the countrys creditbubble and shaky shadow banking system. However, continuingglobalmonetary easing should underpinRios recovery. Trading at 13.23 times earnings some of the value has gone, but the yield still excites at 5.67%.
STAN can
Investors in Asia-focused bank Standard Chartered (LSE: STAN) have endured a miserable five years, with the share price down 50% in that time. Yet the value trap seems to be easing, with the share price up 30% in the last six months. That makes now an interesting opportunity: should you hop on board in preparation for the next leg of the recovery?
You wouldnt buy it for the yield, currently just 1.51%. Nor am I convinced that China is set for a strong recovery. Standard Charteredisntcheap either, on a forecast P/E of 33 while earnings per share (EPS) are forecast to be flat in 2016. However, EPSare expected to rise a stonking 133% next year, halving that P/E to a more amenable 15 times. Pre-tax profits should double from 1.1bn to around 2.1bn although thats mostly due to cost-cutting with forecast revenues flatat around 10.8bn. The value trap will eventually be sprung, but you should be preparedto give it several years.
If you’d bought any of these companies at the wrong time, you will have made an expensive mistake.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
