In the search for capital growth a rising share price we investors cant resist a falling or fallen share price it seems.
Whats that all about! Any non-investing layman would probably look on in disbelief as we all scrum around the latest company that has demonstrated the failure of its business model by posting collapsing profits.
Surely, might go the cry, capital growth is best delivered by robust businesses, trading well with perky growth in their chosen market niches.
Its about turnaround potential
When a share price falls by around 45%, as Wm Morrison Supermarkets(LSE: MRW) has since early 2012, its natural to wonder whether the shares offer better value than they did before the decline.
Lets think of better value as getting the same thing cheaper. In the case of Morrisons, thats not the case. Instead of getting the same business as before, buying Morrisons shares now gets us a supermarket business earning around half the annual profits that it did before. So, in terms of earnings, the value seems about the same despite Morrisons share-price plunge.
The next question is whether Morrison has potential to earn, once again, what it did before an earnings recovery. If that happened, Morrisons share price would surely rocket delivering the capital growth after which we all hanker. A tempting thought, but an investing proposition thats much more difficult to achieve sorting out a promising turnaround candidate from a no-hoper can boil down to nothing more insightful than guesswork.
Fire fighting might halt the decline
City analysts following Morrisons reckon profits will stage a modest bounce-back during year to January 2016 up about 9%. Thats just the firm fire fighting though; its not some magical restoration of previous profitability on existing operations as the business returns to its purple patch.
The trading landscape has changed. Morrisons chairman thinks the customer shift to value-seeking is structural this time rather than cyclical, and that means an on-going fight with discounting competition, such as Lidl, Aldi and others, and permanently squeezed prices on Morrisons own shelves the message is that previous profitability from the old way of doing business is not coming back.
Morrisons fire fighting includes slashing the prices of 1,200 of its products; finding 1 billion in cost savings over three years; improving the layout of big stores, and investing in the opening of 200 convenience stores. However, such measures wont restore the old business at all. What they will do is create a new business.
Shifting to convenience stores, for example, is a new way of trading for Morrisons, so the firm will be looking for new growth rather than relying on a reversal of fortunes in its existing business. Perhaps thats just as well as I think it was legendary investor Warren Buffett who once uttered that, turnarounds seldom turn.
What now?
Morrisons isnt a value proposition or a turnaround candidate, I reckon. Some forward progress will probably occur from this new lower level, but a low-margin retailing operation isnt my first choice for a decent capital-growth investment, especially one that has recently been unable to trade flat, let alone to grow.
I’m inclined to look elsewhere for a capital-growth investment now, such as three companies that seem poised to do well this year and beyond.
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Kevin Godbold has no position in any shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
