Today, I’m going to review one unpleasant aspect of investing: making losses. For example, I recently bought a popular FTSE 100 stock in high hopes. At first, the share price rose steadily, but it has plunged since February. Do I hold tight, hoping for recovery, or sell up and move on?
My FTSE 100 flop
In our new mini-portfolio of 17 stocks, my wife and I own seven Footsie shares. We bought these as value/income/dividend plays. Unfortunately, our shares in telecoms giant Vodafone Group (LSE: VOD) have been a big disappointment.
Our Vodafone stock is the second-worst performer among our crop of large-cap shares. We bought into the business in December 2022 at 90.2p a share. On Monday, 20 February, Vodafone hit a 2023 closing high of 102.76p. Alas, it’s all been downhill since then.
As I write, the Vodafone share price stands at 74.03p, valuing the group at £19.9bn. This is a mere fraction of the mega-cap valuation the group sported at the peak of the dotcom bubble in 2000.
Here’s how the shares have performed over seven periods:
| One day | +0.4% |
| Five days | +0.7% |
| One month | -9.3% |
| Year to date | -12.2% |
| Six months | -12.2% |
| One year | -42.1% |
| Five years | -60.5% |
As well as falling almost a tenth in a month, Vodafone shares have lost more than two-fifths of their value in 12 months. Even worse, they have collapsed by more than three-fifths in five years. Ouch.
Sell up or sit tight?
To date, my wife and I are sitting on a paper loss of 17.9% from our Vodafone holding. Do we crystallise this loss by selling, or hold tight and hope for better times?
At some point, almost every investor faces this exact dilemma: admit my mistake or stand firm? Investing legend Peter Lynch, former manager of the Magellan Fund, one remarked, “Selling your winners and holding your losers is like cutting the flowers and watering the weeds”.
So is this FTSE 100 share a weed to be uprooted, or a flower to be patiently watered?
Weed or rose?
For me, the way to tackle this thorny problem is to look at the share fundamentals, plus the overall business. For many years, Vodafone shares have been a value trap for unwary investors. But its shares look undervalued to me today.
At current price levels, this Footsie stock trades on a price-to-earnings ratio of 7.6, for an earnings yield of 13.2%. That’s inexpensive, compared to the wider FTSE 100 index.
Also, Vodafone’s dividend yield of 10.5% a year is one of the very highest in the London market. However, this payout is covered only 1.3 times by earnings, offering little room for manoeuvre.
In short, these shares are cheap, but they have been so for years. Then again, two recent events give me hope for Vodafone’s future.
The first is the appointment of new CEO Margherita Della Valle in April. Perhaps this new broom will sweep away some of the group’s cobwebs? Second, Vodafone has finally agreed terms for a UK joint venture with partner CK Hutchison. Perhaps this might inject new life into the business?
In summary, we have decided to hold onto our Vodafone stake — for now, at least. But we won’t hesitate to sell if this FTSE 100 firm takes a nasty turn!
