Roughly a year ago, my wife and I started building a standalone portfolio of equities. From June to December 2022, we bought 17 new holdings, including seven FTSE 100, three FTSE 250 shares, and seven US stocks.
The 10 FTSE 350 shares were all bought as value/dividend/income plays. Unfortunately, two of them have turned out to be big losers thus far. Here they are.
#1: Persimmon (-36.1% to date)
We bought into UK housebuilder Persimmon (LSE: PSN) at 1,856p per share. On Friday, this stock closed at 1,186p, down more than a third from our entry price.
The reason we bought into this £3.8bn company was that its shares had already crashed hard from their 2022 high of 2,930p. Alas, this weakness continued, with the stock currently a mere 6.5% above its 52-week low of 1,113.5p, hit on 12 October 2022.
Over one year, this FTSE 100 stock has slumped by 38.6%, plus it has lost 56.5% of its value over five years. That’s partly because soaring household bills and rising interest rates have made buying homes much harder than in 2021-22.
The good news is that I’ve re-learnt a powerful lesson from buying this slumping stock. When we bought into Persimmon, the group’s dividend yield was well into double digits. History has often shown that such sky-high cash yields are not sustainable in the long term. I’ll remember this when looking for Footsie ‘fallen angels’ in future.
#2: Direct Line (-23.2%)
The second FTSE stock in my ‘top of the flops’ parade is Direct Line Insurance Group (LSE: DLG). We bought into this well-known insurer at a price of 200.3p in late July 2022.
On Friday, Direct Line shares closed at 153.8p, valuing the business at just over £2bn. This leaves us nursing a paper loss of almost a quarter. Also, the share price is a long way from its 52-week high of 260p, reached on 29 June 2022.
Over one year, this FTSE 250 stock is down 38.1%, while it has lost 56.9% of its value in five years. The reason for this slump is simple: soaring claims expenses and repair costs forced Direct Line to suspend its generous dividend payouts. 2022’s final payment was withdrawn on 11 January, sending the share price plunging since then.
Again, when a company paying out generous dividends cuts or suspends these payouts, its shares often take a beating. This has certainly caused some pain for Direct Line’s shell-shocked shareholders.
My lesson here is that I should have realised that sky-high inflation would send insurers’ costs soaring. After all, I did work in this sector for 15 years!
Would I buy either stock today?
We won’t add to our Persimmon stake. It trades on 6.8 times earnings with a forward dividend yield of 5.1%. Though these fundamentals look attractive, I expect the UK housing market to worsen before it gets better. Hence, I’ll pass for now.
As for Direct Line, former CEO Penny James was replaced by Jon Greenwood as interim CEO this year. Perhaps a permanent leader will get to grips with turning this tanker around? But until that happens, I won’t buy more shares.
So, what would I buy today? I still see the FTSE 100 as cheap, so I’d buy Footise stocks with low ratings and sensible dividend yields.
