I last wrote about integrated services and construction company Kier Group (LSE: KIE) back in September 2017 when the share featured in my snappily titled article “2 big-dividend stocks that could send you to the poorhouse.”
At the time, the share price stood close to 1,145p. Today, it’s at 153p as I write.
Where were all the bears?
So I’m patting myself on the back for not buying any of the shares myself in 2017, for recognising that the sector is not a very good one, for writing the bearish article, and for adhering to Warren Buffett’s famous first rule of investing – don’t lose money.
I think it’s interesting that Kier’s share price hasn’t stopped drifting lower since my last article in 2017, yet I felt lonely in my bearishness and many bullish articles appeared about the firm for around a year following. Why should that be? I think it is probably down to quantitative analysis. If you focus on the numbers alone, Kier looked better and better value all the way down, whereas my bearish call relied on qualitative analysis and a firm opinion about the nature and cyclicality of the sector.
Too much focus on raw numbers can get investors in trouble, I reckon. In 2017, the shares were going up, revenue was ticking higher, earnings had melted up, and the directors had slapped 5% on the dividend on the back of bullish talk in the financial reports.
However, I argued back then that it can be hard for construction firms to remain consistently profitable: “There’s always the potential for a firm like Kier to mess up in the tendering process or during the execution of a project.” My conclusion was to ask the question, “why take the risk by investing in the sector at all?”
What goes down sometimes goes up
The most recent lurch down in the share price coincides with last week’s profit warning. But there was also a Rights Issue and Placing last year to raise money needed to pay down some of the firm’s big debt load. On top of that, I reckon the stock market has gradually been marking down Kier’s valuation because of the firm’s cyclicality. Little profits follow big profits with cyclical firms. The market knows that and tries to anticipate the next cyclical plunge in earnings, dividends and the share price in the only way it can — by reducing the earnings multiple.
But what now? The stock has fallen a long way and the valuation looks compelling, for what that’s worth. As I write, the share price sits at 153p, which puts the forward-looking price-to-earnings ratio for the trading year to June 2020 at about 1.7.
However, regardless of what the valuation says, I’m more interested in the share-price action. Earnings strike me as being volatile and unpredictable, but the share price is likely to move in cycles and an up-move could follow a down-move. This is never going to be a long-term buy-and-hold investment for me, but I am poised to pounce to try to catch the next up-leg, which is likely to start when the news flow is at its worst.
