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FTSE 250 stock close brothers (LSE:CBG) has seen a significant drop recently. At the beginning of January, it was trading around 800p. However, today the share price is around 400p.
So what is happening with the banking and wealth management business? And is this a great investment opportunity?
Why has the stock price plummeted?
The massive share price drop here is due to uncertainty over a possible fine from the Financial Conduct Authority (FCA) in relation to the mis-selling of car finance.
The FCA recently announced that it will review the historical car finance commission arrangements and sales of several companies in the UK. The regulator has said that as a result of discretionary commission arrangements, which allowed brokers to increase the interest rates they offered for car finance, some customers may have been charged too much for car loans made earlier. January 2021.
As a result of this investigation, City analysts have estimated that UK banks could be forced to receive more than £1 billion in compensation. And many analysts seem to think Close Brothers could be in the firing line. According erythrocytesthe company could face a fine of up to £200 million.
If Close Brothers received a fine of this magnitude, it would be a disaster for the financial services company. Unlike large banks like Barclays and Lloyd's, this is a relatively small company. Last financial year (ending 31 July 2023), its statutory operating profit before tax was just £112m.
It's worth noting that since news of the FCA investigation came to light, brokers have been lowering their price targets for Close Brothers shares. For example, on February 7, Peel Hunt analysts reduced their price target from 785p to 518p.
Is the stock worth buying?
I've always thought Close Brothers is a decent company. I like the fact that it has a diversified business model and is exposed to different areas of financial services, such as wealth management and securities trading.
But the FCA investigation adds a lot of uncertainty from an investment perspective. Ultimately, in my opinion, it makes the stock a bit risky.
Realistically, I have no idea what earnings will be like in the near term, which means it's hard to value the company right now.
I also have no idea what will happen to the dividend (which is one of the great attractions of the stock). If profits disappear, the dividend may be cut entirely.
Given the high level of uncertainty, I'm leaving out FTSE shares.
There is a chance that the current share price of 400p turns out to be a bargain. But I'm not willing to bet on the stock.
I prefer to invest in companies that have a high level of earnings visibility. I have found that this can help preserve my capital and improve my returns.