As an investor, its tempting to think that these formerly successful businesses are now cheap turnaround buys.
In this article Ill take a look at each company and ask whether now is the time to buy or whether these shares remain falling knives that are likely to slash your wealth!
Star fund manager Neil Woodford has a record of making good calls on major stocks. Mr Woodfords blog post last week made it very clear that hed lost faith in the ability of the firms management to deliver reliable profits.
One particular problem is the strange way the group sells its aero engines, taking an initial loss on the sale of the engine and making a profit on aftersales service deals. While investors were happy to accept this opaque accounting when times were good, concerns are rising as profit margins from new engines are expected to be lower over coming years.
Rolls new chief executive, Warren East, has said that the group will not issue medium-term earnings guidance for the next year or so, as the outlook is too uncertain. This suggests to me that current broker forecasts may be worth very little.
In my view its too soon to buy back into Rolls-Royce. Watching patiently from the sidelines may be the best way to avoid further losses.
Once seen as a strong rival to ARM Holdings, Imagination is now more of a distant relative. ARM shares have risen by 74% since 2012, while those of Imagination have fallen by 72%.
Imagination shares fell by another 6% this morning, after the firms interim results showed a first-half operating loss of 20.8m. Thats double the 10.3m loss reported for the same period last year.
Total revenue was down by 13% to 71.1m, from 82.2m during the first half of last year.
Imagination spends heavily on research and development, and says that this spending will now be cut. That could help turnaround the business in the short term, but risks the firm falling behind its competitors for future products. I dont see any reason to buy this stock at the moment.
Its been a poor year for the diamond market. Both prices and demand have fallen further than expected. Petras shares have followed suit, losing 66% of their value.
However, analysts following the firm are becoming increasingly bullish. They expect to see a sharp recovery in the 2016/17 financial year. The latest forecasts suggest that Petras adjusted earnings per share will rise from 8.9 cents for the current year to 21 cents per share next year.
This puts Petra on a 2015/16 forecast P/E of 11, falling to a P/E of just 5 in 2016/17. Theres also an attractive forecast dividend yield of 3.1% for the current year and 5% for next year.
The reason for this expected growth is that production from new mine expansions is expected late next year. The good news is that thanks to a $300m debt issue last year, the firms balance sheet remains relatively healthy, with net gearing of around 30%.
Petra could be a profitable buy at todays prices, assuming diamond demand doesnt fall further.
A more reliable choice?
If you’re looking for a more reliable growth stock for 2016, then I would suggest a careful look at the company chosen for “A Top Growth Share From The Motley Fool“.
This fast-growing business is a home-grown British success story with global ambitions.
Top Motley Fool analysts Mark Rogers believes that this firm is “barely scratching the surface” of its long-term potential. He rates the shares as a strong buy.
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Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of Imagination Technologies. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.