The car dealership chain Lookers (LSE: LOOK) is a big gainer today, with an over 90% increase in share price as I write. The reason for what looks like a huge increase in the Lookers share price has to do with its re-listing on the stock exchange.
Following the reveal of a £19m hole in its accounts last year, the company’s share had stopped trading. The trading re-started today after it released its financials for the first half of 2020 and also provided a trading update for the second half of the year.
The company reported a 40% decline in revenue in the first half of 2019, a three-digit fall in profits, and has decided not to reinstate dividends for now.
Why the Lookers share price is up
So why is the share price up?
I think it’s because of the optimism in the full-year trading update, also released with the half-year results. There are a few points here, which indeed sound promising. Performance in the second half of this year is expected to be better than last year. As a result, the underlying loss for the first half is likely to be offset. Adjusting to the ‘new normal’, which includes contactless car sales, has helped. This change is also expected to mitigate the revenue loss because of showroom closures in the current lockdown.
With changes in both top personnel and auditors, LOOK appears poised to put its past behind it for now.
This sounds quite positive, and the stock markets have rewarded companies with potential very well since the start of the stock market rally in November, 2020.
Risk ahead
But there are challenges ahead too. UK vehicle production has been severely impacted by the lockdowns. It’s currently at levels last seen in 1984. New car sales are down to numbers last seen in 1992.
With the pandemic still underway, we can’t guarantee that the lockdown will end any time soon. In fact, it could be months before we return to the ‘old normal’.
Even though the improvement in LOOK’s performance is heartening, the broader environment can’t be ignored. And it looks quite challenging.
The company’s past financial record doesn’t inspire great confidence either. Its revenues have been flat in the past few years, and its net income was declining steadily until it became actually loss-making in 2019.
The takeaway
I reckon there can be high short-term returns for investors from investing in LOOK, which is possibly why the price has risen. But I see it as a high-risk buy, that makes me uncomfortable for now, at least.
I’d wait for genuine proof of its performance improvement and a friendlier market environment before considering buying the share. In the meantime, I think there are plenty of rewarding but far less risky stocks to choose from.
These include FTSE 100 stocks that have managed not just to perform relatively well despite the challenges of 2020, but also double their share price. They are better deals than the Lookers share price to me.
