After a 45% fall, is this innovative financial stock a buy for 2020?

I think we might be looking at an oversold stock here, or could it be a falling knife to avoid?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When your only alternative is a payday loan with super-high interest rates, you might be tempted by a guarantor loan with a rate of around 50%. That’s the idea behind Amigo Holdings (LSE: AMGO), which lends you money if you can find a guarantor. But I’d think twice before I’d be a guarantor for someone who’s presumably a credit risk. Still, I can see the attraction.

The prospects for that model haven’t been as attractive for investors as the company had hoped. Since its IPO in July 2018 at an offer price of 275p, the shares were down 76%. Until market close on Friday, 24 January, that is.

On Monday, the price crashed a further 45% in early trading, though it recovered some of that during the morning. At the time of writing, the shares are 22% down on the day, for an 80% fall since flotation.

We’d already been looking at very low P/E multiples, and perhaps a tempting valuation. And just a few months ago, fellow writer Karl Loomes was wondering whether Amigo was cheap enough to buy. In fact, at the time I’d seen the shares as a buy myself. But I imagine Karl is pleased he’d seen reason to be cautious, and I’m certainly happy I didn’t invest. 

What happened?

It’s all down to the company’s biggest shareholder, Richmond Group, deciding to sell its 60.66% stake in Amigo.

After the Monday price crash, Amigo’s market-cap is standing somewhere around £250m. So the value of Richmond’s stake stands at approximately £150m. Trying to sell that value of shares on the open market without killing the price isn’t practical. And there’s no buyer lined up yet.

The company has announced a strategic review, which will cover a number of possibilities. Amigo says it “will consider various aspects of the company’s strategy, ownership and operating model, including the potential sale of the company as a whole, the sale of parts of the group, reorganisation of entities within the company’s group, the sale of the UK business, the sale of certain books of business including a potential de-listing of the company’s shares.

So, essentially, anything could happen. And private shareholders might have no say in the matter and could have their shares sold out for them. It’s no wonder there was such a negative reaction. But Amigo is bound to get the best it can for shareholders in any sale, so is there a bargain here?

Trading

Amigo released a trading update along with the shock Richmond announcement, saying it “continues to face a challenging operating environment.” The firm, apparently “remains within guidance for loan book growth and impairments for the period of nine months ended 31st December 2019.” And it says it “remains confident in the robustness of its approach to lending decisions.”

But the firm sees a threat from fears “that there may be increased pressure on our business and a continual evolution in the approach of the Financial Ombudsman Service.” As a result, the strategic review could lead to future lending volumes being hit.

The shares are now on a forward P/E of only 3.3. But with the viability of the company in question, I’m staying away from what I think has turned into a pure gamble.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »