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As I get older (I’ll be 55 next month), it’s getting easier and easier for me to admit that I’m wrong. For me, the problem is not making mistakes, but how I deal with them. Also, they say that confession is good for the soul. So here are two cheap stocks I bought last year that soon turned into full howlers.
When cheap stocks turn bad
1) Persimmon Dips
By far my biggest mistake in 2022 was buying the cheap shares of the leading UK homebuilder. Khaki (LSE: PSN). At the end of July, my wife bought this FTSE 100 stocks for our family portfolio due to their enormous dividend yield. Unfortunately, Persimmon’s double-digit cash yield soon turned into a double-digit price drop.
After Persimmon shares had already fallen sharply from their 2021 highs, we bought these shares at 1,856 pence. The share price is now 1,418 pence, 438 pence less than our purchase price. That’s a loss of almost a quarter (-23.6%) in around six months. Oh.
In my autopsy to establish what went wrong, I was reminded that ultra-high dividend yields rarely last. Too often, stock prices crash or dividends are slashed. To be sure, Persimmon’s last annual dividend of 235 pence per share will not be paid in 2022/23. Instead, I expect to collect less than half of that. oops.
Persimmon’s shares are down more than two-fifths (-40.6%) over the past year and could be further affected by rising interest rates and falling disposable income. But we will hold on to our stocks for their recovery potential. As an old stock market saying goes, “Many long-term investments started out as short-term losses”.
2) Falls of International Distribution Services
The second of my cheap stocks to drop is the stock of International Distribution Services (LSE: IDS). If that name doesn’t ring a bell, it’s the recently introduced identifier for the former Royal Mail Group.
Of course, Royal Mail is a British institution, with a storied history dating back to 1516 and King Henry VIII. But its most recent history has been one of labor disputes, industrial action and rounds of strikes.
At the end of June 2022, my wife bought this FTSE 250 firm at a total price of 273.2 pence. Unfortunately, beginning in August, the stock plunged as union members went on strike for higher wages and better conditions. With neither party willing to commit, the stock took a beating. At their 52-week low, they tumbled to 173.65p on October 14.
As I write, the IDS share price stands at 228.6 pence, having nearly halved (-48.7%) last year. It is also about a sixth (-16.3%) below our purchase price. Once again, having bought these cheap stocks for their dividend potential, we are now sitting on a sizeable paper loss.
Meanwhile, the group’s market value has shrunk to less than £2.2bn, a shadow of its previous size. And shares could suffer if the board decides to cut the 2022/23 dividend payout. But I see strong potential for a price recovery as long as the group makes do with its striking workforce. For now, we’ll hold on to these shaken stocks in hopes of a decent earnings recovery and dividends once again!
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