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My favorite method for picking stocks is to explore FTSE 100 for distressed companies that appear ripe for recovery. That way I can acquire them at a lower valuation and with a higher yield. And I can benefit when they are favored again. Assuming they do.
Investment has a strong cyclical element. One year's loser may be next year's winner, but as always, there are no guarantees.
So instead of buying Rolls-Royce and Marks & Spencer Group, whose shares have risen 225% and 117% in 12 months, should you buy the last two inhabitants of the FTSE 100? A step forward Anglo-American (LSE: AAL) and Santiago Square (LSE: STJ).
Two possible recovery plays
I was surprised to see Anglo American right at the bottom of the FTSE 100 performance chart. It has plummeted 41.44% in 12 months. I know that China's problems have affected demand for raw materials. But I didn't know that one miner had fared much worse than the rest.
Glencorewhich I bought in summer, has dropped “only” 13.47% during the year, while Rio Tinto has risen 0.72%. So what went so wrong at Anglo?
Most of the damage was done on a single day, December 9, when its shares plummeted a whopping 19%. This followed an investor update showing the board will cut capital spending by $1.8 billion over three years. This threatens future revenue and shareholder returns.
It was also cutting jobs and simplifying its structure, in a bid to save $500 million by the middle of next year, plus another $500 million in operating expenses. The group has been pressured 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 trading very cheap at just 4.61 times its earnings. The overall return is 9.61%, but that is misleading. Markets are forecasting 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 need time to recover from a shock as important as this. Its share price has declined, but so has its prospects. It's on my watch list, but I won't be buying it this late in the year for Christmas.
Meanwhile, St James's Place is down 39.9% in 12 months after coming under fire from regulators for its high fees under the Financial Conduct Authority's new consumer rights rules.
It's well deserved, in my opinion. The group has been operating with an outdated advisory model for too long. He claims his overall fees were fair, but they are complex and difficult to understand. News that it was removing punitive exit fees hit the stock price. But the group's response was quite reluctant. Withdrawal fees will not be removed until the second half of 2025, and then only for new customers. In my opinion, St James's Place continues to fail in its duty.
However, it has loyal customers with a high retention rate of 95%. Additionally, his advisors attracted £17 billion in new client investments in 2022, the second-highest figure in history. However, he would not invest in it, since the regulator could come back for more. I don't care if the valuation has fallen to 9.53 times earnings while the yield has skyrocketed to 7.79%. It's not for me.
