Investing in a stock market crash requires caution. Many FTSE 100 stocks, if not most, will take an uncomfortable hit to earnings.
Naturally, investors should stay away from stocks that will struggle to recover after being particularly hard hit by shrinking profit margins. But as with every stock market crash, there are some bargains out there.
Certain companies are well-positioned to quickly recover from a dry-up in demand. What’s more, many are currently trading on cheap valuations. With that in mind, here’s a dirt-cheap FTSE 100 stock I like the look of.
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Unique business strategy
Melrose (LSE: MRO) is a UK-based company focused on acquiring manufacturing businesses. In terms of business strategy, the company aims to buy and turn around businesses with lacklustre performance.
One such business the group has recently acquired is GKN, a multinational automotive and aerospace components company. Since acquiring it, Melrose has reported rising revenues and profits. For me, that shows the group’s unique business strategy is paying off.
A cheap FTSE 100 stock?
The Melrose share price has plummeted by around 60% since mid-February. That’s a staggering drop that far exceeds the near 25% fall in the value of the FTSE 100 index.
The company now trades at a price-to-earnings ratio of just above 6. To me, that suggests good value.
Fears over the sustainability of the business in a time of crisis may explain the sharp fall in the share price. However, I think Melrose shares have been oversold. If so, investors can expect a bounce-back and a swift recovery in the share price.
Strong business fundamentals
In early March, Melrose released its full-year results report for 2019, highlighting achievements ahead of its expectations.
Revenue and operating profit were both up from 2018, rising by 34% and 36% respectively.
Most importantly, net debt improved, falling to £3.28bn. That’s a vital result that could prove to be the difference between the company surviving or going under.
At the end of the report, the company said that “the effects of the Covid-19 outbreak are not fully known at present”. However, “the opportunities to improve GKN in 2020 and beyond position Melrose well to deliver positive returns for shareholders in the future”.
The road to recovery
It’s a comfort to investors that the management team is working to cut costs and preserve cash across all its businesses. This includes taking advantage of government support.
The group further consolidated its cash position by cutting the final dividend. This was due to be paid in May. I see these developments as necessary steps to protect against the long-term economic impact on business.
However, if lockdown restrictions continue, the company could be in trouble. How so? Debt will begin to pile up and cash will dry-up.
That said, if you’re willing to take a long-term perspective, shares in Melrose could be a solid bargain.
Preserving cash and maintaining a healthy balance sheet should offer a strong chance that the company can come out strongly on the other side, rewarding investors in the process.
