My favourite method of picking stocks is to scour the FTSE 100 for struggling companies that look ripe for recovery. That way I can pick them up at a lower valuation, with a higher yield. And I can benefit when they swing back into favour. Assuming they do.
There’s a strong cyclical element to investing. One year’s loser can be next year’s winner, but as ever, there are no guarantees.
So instead of buying Rolls-Royce and Marks & Spencer Group, whose shares have jumped 225% and 117% over 12 months, should I buy the FTSE 100’s two bottom dwellers instead? Step forward Anglo American (LSE: AAL) and St James’s Place (LSE: STJ).
Two potential recovery plays
I was surprised to see Anglo American right at the foot of the FTSE 100 performance chart. It has crashed 41.44% in 12 months. I know China’s troubles have hit demand for commodities. But I didn’t know one miner had done so much worse than the rest.
Glencore, which I bought in the summer, is ‘only’ down 13.47% over the year, while Rio Tinto is up 0.72%. So what went so badly wrong at Anglo?
Most of the damage was done in a single day, 9 December, when its shares crashed a thunderous 19%. That followed an investor update showing the board will slash capital expenditure by $1.8bn over three years. This threatens future revenues and shareholder returns.
It was also axing jobs and simplifying its structure, in a bid to save $500m by the middle of next year, plus another $500m on operating expenses. The group has been squeezed by a combination of rising input costs and falling demand for diamonds (Anglo American owns De Beers) and platinum.
Mining is the most cyclical sector of all and Anglo American is dirt cheap trading at just 4.61 times earnings. The headline yield is 9.61% but that’s misleading. Markets forecast lower returns of 4.39% in 2023 and 4.51% in 2024.
Here’s one I won’t touch
I’m still tempted, but experience shows me that companies take time to recover from a major shock like this. Its share price has been reduced, but so have its prospects. It’s on my watch list but I won’t be buying it this side of Christmas.
Meanwhile, St James’s Place is down 39.9% over 12 months after coming under regulatory fire for its hefty fees under new Financial Conduct Authority consumer duty rules.
Serves it right, in my view. The group has been operating to an outmoded advisory model for far too long. It claims its overall fees were fair but they’re complex and hard to understand. News that it was axing punitive exit fees hit the share price. But the group’s response was quite grudging. Withdrawal charges won’t be scrapped until the second half of 2025, and then only for new clients. If you ask me, St James’s Place is still failing in its duty.
Yet it has loyal customers with a high 95% retention rate. Plus its advisers attracted £17bn of new client investments in 2022, the second-highest ever. I wouldn’t invest in it though, given that the regulator may come back for more. I don’t care if the valuation has dropped to 9.53 times earnings while the yield has rocketed to 7.79%. It’s not for me.
