Is this popular stock a buy after a 10% price crash?

Here are two stocks falling heavily on Monday. Are they set for a quick rebound?

| 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.

Monday morning’s top BBC news headline is all about the rapid and tragic coronavirus spread, with containment battles now spreading as close to home as Italy. In turn, the news is hitting stock markets, with the FTSE 100 dipping 3.4% in early trading. And, perhaps not surprisingly, travel companies are among the big fallers.

Shares in budget airline easyJet (LSE: EZJ) fell as much as 13.5% at one point, though the apparent panic really needs to be seen with a longer-term perspective. Since a dip in June last year, when the Thomas Cook collapse was just a few months away, easyJet shares are still up 55%.

Erratic

Over five years, though, we’re looking at a 20% fall, and it’s been a very rocky ride. I think that helps us see the coronavirus-related sell-off as what it is in easyJet terms, just one of a whole series of events that can send the shares soaring or slumping. If you invest in an airline, I think you have to be prepared for volatile share prices.

But at least with easyJet you’ll have had some decent dividend income to see you through. The dividend itself can be up and down, but a well-covered 3.8% yield in 2019 was healthy, and forecasts suggest 3.9% this year. Those same forecasts now put the shares on a forward P/E of 12.5. That’s modest, but I don’t see a good enough safety margin.

On bullish valuations, I expect easyJet shares to react more severely than most to weaknesses. So it’s not for me, but if you do like this kind of stock, I’d treat short-term dips as buying opportunities.

Travel

The bearish mood has extended across the travel business, with TUI Travel (LSE: TUI) losing 11% shortly after the markets opened. The wider picture here is different, though, as TUI shares have been under intense pressure over the past few years as high-street travel agents feel the pinch.

From a recent peak in May 2018, TUI shares are down 56%. But in this case, I think investors are looking for a recovery over the next few years. Forecasts suggest an earnings rise of more than 30% for 2020, and that would put the shares on a P/E of only eight.

In turn, the share price weakness has pushed the dividend yield to 4.8%. And that would be covered more than 2.7 times by earnings. Looking good? There are downsides…

Debt

One is the dividend trend. Although the current yield looks attractive, TUI has a new dividend policy in place and payments are way down on 2018’s peak. That seems wise, seeing as TUI’s net debt stood at €5,072m (£4,253m) at the end of the first quarter. And that debt is the other thing I really don’t like.

I’m also concerned that recent upbeat sentiment after a record-breaking Q1 is already fading. TUI enjoyed a boost from business that would have gone to Thomas Cook, but the long-term pressure on the industry is still there.

TUI shares look cheap, and the company is expanding by acquisition. But though I could see profit for investors over the next two or three years, a future downturn coupled with the weight of debt could result in tears. It’s just too risky a business for me.

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

Should I sell my FTSE All-Share index fund and buy a S&P 500 tracker instead?

Harvey Jones is wondering whether now is a good time to invest more money in the S&P 500, after a…

Read more »

Investing Articles

Should I buy dirt-cheap BT shares after the recent pullback?

BT shares were on the up but now they're sliding again after the board trimmed full-year guidance. Now Harvey Jones…

Read more »

Investing Articles

Up 28%, can the easyJet share price keep rising?

The easyJet share price has gained altitude over one year but plunged over five. Is now an attractive time for…

Read more »

British Isles on nautical map
Investing Articles

Should I buy more BAE Systems shares at 1,350p?

BAE Systems shares have had a fantastic run since early 2022, yet still don't appear overvalued. Is it now time…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

7% yield and a cheap valuation! Is this one of the best shares to buy this month?

Christopher Ruane has been looking for cheap shares to buy. This one has a 7% dividend yield, so is it…

Read more »

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

Should I buy National Grid shares for the big dividend before it’s too late?

This year's price weakness has left National Grid shares on what looks like a tempting valuation. I hope it doesn't…

Read more »

Investing Articles

There are now 5,000 ISA millionaires! See the surprising UK dividend shares they’re buying

The number of ISA millionaires is growing all the time and guess what? They're really into blue-chip dividend shares listed…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Down 38% in weeks! Time to snap up NIO stock?

NIO stock's more than doubled in value over the past five years but has been on a wild ride lately.…

Read more »