Buying shares that have been heavily sold off is a common mistake for beginner investors as shares trading near 52-week lows tends not topay off. Caught in a downward price spiral, they usuallyfall further for some time.
Sometimes, though, theybounce back. How do you establishwhich shares are most likely to recover? Investors should examinethe causes of the sell-off, trading outlook and turnaround plans. Lets do that forthree shares trading near their 52-week lows.
Drax Group plc(LSE: DRX) has been hit hard by the withdrawal of the exemption of biomass electricity generation from the Climate Change Levy. The power generator, which has been switching from burning coal to wood pellets, expects the change tocost it about 60 million annually. This wasa complete surprise and undermined the investment case for spending on the conversion of its power plants.
Worse still, wholesale electricity prices have been falling, reducing potential revenues ahead. With profitability squeezed by top-line and bottom-line pressures, Draxs free cash flow would be much reduced, meaningitsdividends are at risk.
Analysts expect underlying EPS tofall by 52% this year, and its dividend tobe slashed (again) to 5.6p per share, from 11.9p this year.With earnings momentum clearly trending downwards and dividends shrinking, a recovery just doesnt seem likely.
Aberdeen Asset Management plcs (LSE: ADN) shares have fallen less steeply, with a loss of 34% over the past year. Fund outflows this year exceeded 10% of its total assets under management, following the collapse ofinvestor sentiment towards emerging markets in the wake of slowing economic growth and a strengthening US dollar.
But, on the upside, Aberdeen is still hugely profitable and generating substantial free cash flows. Underlying EPS has fallen 5% this year, to 30.6p, but that still leaves the company with a 42.7% operating margin. Core operating cash flow declined by just 2%, to 532 million, allowing the company to raise its dividend by 8.3%, to 19.5p per share. Furthermore, itsstrategy of diversifying by product and geography should combat fund outflows in the longer term and abate the decline in earnings.
Valuations are cheap too, with a P/E of around 9.8 and a dividend yield of 6.5%. If youre looking to pick up a quality company on the dip, Aberdeen Asset Management seems to be a great choice. But be warned, with sentiment still negative towards emerging markets, theshares could fall further before making a recovery.
Long road ahead
Lonmin Plc (LSE: LMI) is one of the worst performers this year, with its shareshaving lost99% of theirvalue over the past 52 weeks. Platinum prices, ata seven-year low, are largely to blame. But, even before this years decline in commodity prices, the platinum miner lagged behind many of its peers, indicating its problems are actually a combination of structural and cyclical factors.
Labour disputes and rising costs have made it difficult for Lonmin to mechanise production, and a significant proportion of its production had beensold below cost price. The miner has a lot further to go in cutting costs, as well as reducing the size of its 36,000-strong workforce. City analysts arent optimistic, with forecasts that underlying pre-tax losses will be $46 million in 2016. Unless commodity prices make a spectacular recovery in 2016, Lonmin is unlikely to bounce backsoon.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Aberdeen Asset Management. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.