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Is it time to buy 'bombed-out Carillion?

The short-sellers' favourite has turned up on the radar of the "Bombed Out but Bouncing Back" portfolio. Will it be the next Interserve?

Carillion building site
Could a reborn company emerge from the rubble?

Something strange has been happening of late in the “Bombed Out” portfolio screening process; it is generating more fallen giants.

After months of the inappropriately-described recovery stocks virtual portfolio churning out what might charitably be termed tuppenny-ha'penny stocks of indeterminate provenance, the screen's parameters have recently given us a succession of well-known names that have fallen on hard times, such as Dixons Carphone, the AA, Petrofac and Acacia Mining.

As a quick reminder, I should explain the idea behind this virtual portfolio experiment is to invest in stocks that have lost a third of their value in the last year but which are starting to show signs of having turned a corner.

As demonstrated by the fact that the portfolio has lost more than 40% of its starting value in less than five months, most of those stocks have turned the corner only to drive full-speed into a brick wall, though to be fair around £1,500 of the portfolio's £4,000 or so losses have come from assumed dealing costs.

Throughout the experiment I have dutifully invested in all of the crackpot stocks generated by the stock filter, but from a personal point of view I am a lot happier investing in companies of the stature of Hikma Pharmaceuticals PLC (LON:HIK), which has a market value of £2.4bn, than, say, some hit-and-hope oil exploration tiddler.

As it happens, Hikma exited the portfolio this week, along with Petrofac PLC (LON:PFC), Petra Diamonds Limited (LON:PDL), Acacia Mining PLC (LON:ACA) and AA plc (LON:AA).

All exited showing small losses, most of which were accounted for assumed dealing costs of £15 per buy/sale. Having said that, the losses were incurred in a week when the Footsie hit new highs, and the suspicion is that the stock filter is identifying recovery stocks just at the point when the smart money is heading for the exit.

Stocks exiting the Bombed Out but Bouncing Back portfolio

AA: sold 590 shares @ 162.45p a share to raise £944, for a loss of £104 (9.9%).

Acacia Mining: sold 510 shares at 187.55p to raise £942, for a loss of £102 (9.8%)

Hikma: sold 90 shares at 1,072p to raise £950 for a loss of £82 (7.9%)

Petra Diamonds: sold 1,275 shares at 78.55p to raise £987 for a loss of £57 (5.4%)

Petrofac: sold 200 shares at 516.2p to raise £1,017 for a loss of £22 (2.1%).


Happily, one stock survived the cull: Interserve PLC (LON:IRV).

I say happily because, unexpectedly, the construction and services company took a break from issuing profit warnings and issued whatever the opposite of a profit warning is.

True, the update was of the “I've only blown my foot off rather than the whole leg” kind, but it did wonders for the share price and the “Bombed Out” portfolio.

READ Interserve forecasts better-than-expected 2018 operating profit due to lower costs

The shares have almost doubled in the last month, and although doubts still remain about the very survival of the company, which is saddled with debt and many unprofitable contracts, Wednesday's update holds out the prospect of light at the end of the tunnel.

The sales raised enough money to invest in four stocks this week, and coincidentally the stock screen generated exactly four candidates, including one that bears a lot of similarities to Interserve, only more so (if that makes sense).

I refer to Carillion PLC (LON:CLLN), the mother of all binary punting stocks at the moment.

It is the most heavily shorted stock on the London stock market at the moment, with 15.2% of the shares in issue having been lent by institutions to punters so they can sell them (“go short”) in the hope of buying them back cheaper later.

The market does not often get it wrong in these sorts of situations, although Morrisons gave the shorters a bit of a spanking yesterday, so it is with some trepidation that I add Carillion to the portfolio but the downside is “only” 100%, whereas there is no limit to the upside.

The portfolio that comes with a wealth warning

Once again, however, I should warn readers that this virtual portfolio is purely experimental in nature, and as someone who watched the excellent Young Frankenstein in the West End last Saturday I can confirm that some experiments can go horribly, horribly wrong, as this one has – although thanks to Interserve, it is currently putting on the Ritz.

(It might be worth mentioning in passing that 8.64% of Interserve's shares were in the hands of shorters as of last night).

Not everyone will be keen on the idea of putting money into Carillion's shares; take, for instance, the Carillion board, which earlier this week issued a brief, dismissive response to Monday’s surge in the share price that was prompted by chatter that the embattled construction contractor could be close to a rescue deal, and even a potential government bail-out.

Be that as it may, the stock goes into the portfolio, with 5,700 shares bought (yesterday) at an average price of 21.16p. Already we are sitting on a profit of more than a hundred quid; what could possibly go wrong?

This week also sees the return of Dixons Carphone Plc (LON:DC.) to the portfolio, after it was sold off last week, for an almost unprecedented £651 profit.

Last year Dixons put out its trading update on 24 January so it looks like that will be the next share price catalyst, although the shares did take a bit of a dip today as Humphrey Singer, the group finance director announced his decision to jump ship to Marks & Spencer.

That's a bit like quitting Leeds United for Nottingham Forest, two illustrious clubs with magnificent futures behind them, but good luck to him.

The Dixons shares – all 590 of them – were bought at an average price of 203p, which is a bit annoying as we sold them for 200.6p at the beginning of the year.

Another fallen giant joining the gang is doorstep lender Provident Financial PLC (LON:PFG).

A lot of companies justifiably claim to be operating in tough market conditions but Provident seems to have generated a lot of its own problems.

READ Provident Financial backtracks on home credit strategy as it launches recovery plan

A decision to switch from self-employed debt collection agents to its own employees backfired disastrously, and the group has also had more than its fair share of runs-in with the regulators.

One of its brands is Satsuma Loans, whereas the stock itself could more accurately be described as a lemon.

Analyst Portia Patel at broker Liberum believes the home-collected credit arm is “permanently damaged”, while Moneybarn has been lending aggressively at the top of the cycle. She also said “funding concerns” remain.

Since she issued that note the stock has risen 15% on zero news flow, but the number of short-sellers has risen this year, with around 11% of the company's shares lent out to short-sellers, up from 2.2% at the beginning of the year.

As the old saying goes, I would not buy this stock with your money, but the stock filter says it fits the bill, so we have bought 129 shares at 918.6p each.

Lastly, we move on to a Proactive Investors' favourite, Hurricane Energy PLC (LON:HUR), an oil and gas company focused on hydrocarbon resources in naturally fractured basement reservoirs.

Unlike the others, this stock has never come close to being a member of the FTSE 350, but it has had its time as a glamour stock, soaring from 10.125p at the end of 2015 to 49.75p at the end of 2016.

Unfortunately, it now trades at around 33.78p, but this may represent a buying opportunity.

READ Share price catalysts ahoy! Hurricane Energy is expected to have some significant news for investors very soon

READ Hurricane Energy gearing up for a potentially transformational year

The company said in November it is exploring a number of options, including a listing on a premium segment of a recognised stock exchange.

The directors believe that a premium listing could provide the company with a more appropriate platform for its growth, raise the company's global profile, potentially increase its trading liquidity and provide it with a wider addressable investor universe for its ordinary shares.

Amen to all that, but in the meantime, we'll settle for a couple of weeks of the share price heading north after buying 3,630 at 33.19p.

Here’s where we currently stand with the Bombed Out portfolio

 

Company

No. of shares

Total cost

Average price paid

Current bid price

Current value

Profit/ loss £

Profit/ loss %

Carillion

5,700

£1,206

21.16p

21.2p

£1,208

£2

0.2%

Dixons Carphone

590

£1,213

205.54p

203.1p

£1,198

-£14

-1.2%

Hurricane Energy

3,630

£1,205

33.19p

33.5p

£1,216

£11

0.9%

Interserve

1,065

£1,043

97.91p

119.7p

£1,275

£232

22.3%

Provident Financial

129

£1,216

942.43p

918.6p

£1,185

-£31

-2.5%


 

  • Cash: £9
  • Total value of original £10,000 portfolio: £6,091
  • Profit./loss on closed trades and dividends: -£4,108
  • Unrealised profit/loss on current holdings: -£200
  • Total profit/loss: -£3,908

 

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