FTSE 100 Contrarian: Investing In The Losers
Back in 1939, one of the pioneers of international investing, Sir John Templeton, borrowed money to buy 100 shares in each of the 104 companies on the New York Stock Exchange that were trading at under $1 -- 34 of which were in bankruptcy at the time. Only four ended up worthless and he made large profits on the rest.
While I don't advocate borrowing to invest or picking shares based solely on an arbitrary pound value, I do appreciate Sir John's courage to invest in unloved shares as Europe entered into war.
Times aren't nearly as dire today, but I've decided to channel my inner Templeton and take a look at the opportunities presented by the worst performing shares in the FTSE 100 last year (ignoring those shares that were relegated to the FTSE 250 for simplicity's sake) and create a hypothetical portfolio to track their performance during 2013.
In case you missed it, I previously looked at the five worst performing shares for the year in this article. Today, I'll be looking at losers six through 10, and this list has some big names in it.
|Company||Market cap (£m)||2012 performance|
|Tesco (LSE: TSCO)||28,348||(17%)|
|Kazakhmys (LSE: KAZ)||4,027||(16%)|
|Shire (LSE: SHP)||11,768||(16%)|
|Vodafone (LSE: VOD)||82,637||(14%)|
|Aggreko (LSE: AGK)||4,723||(14%)|
Returns do not include dividends
Apparently not one for procrastinating, Tesco kicked off 2012 with its first profit warning in nearly a generation, which sent the shares plummeting 16% in one day. The shares spent the rest of the year bouncing around the 320p mark (with trips as low as 300p and as high as 350p) as CEO Philip Clarke tried to prove the company hadn't completely lost touch with domestic consumers. The decision to stem the bleeding by cutting off the company's US venture, Fresh & Easy, as well as signs that the UK revitalisation was winning back customers had the shares rebounding as the year came to a close.
Further evidence that Tesco has secured its spot atop the UK grocers' mountain without completely sacrificing margins, as well as some rejuvenated growth in the company's European and Chinese operations, will be needed to recover what was lost on 12 January 2012.
This Kazakhstan-based vertically integrated copper producer (they pull it out of the ground and refine it to an industrially usable product) suffered from a combination of weaker prices for the red metal and rising labour costs, which resulted in the Board slashing the dividend, and the troubles at steel producer ENRC of which it owns 26%.
As ENRC's shares slid during 2012, the value of Kazakhmys' holding dropped from £2.5bn to £897 million or 65%, which obviously had a material impact on a company whose market cap started the year around £6.3bn.
A global economic recovery would help boost the demand for both steel and copper, but until that happens investors are likely concerned about Kazakhmys's transformational expansion plans -- two new mines expected to boost output by 60% and cost about £2.5 billion over the next three years -- which increase the risk profile of the company.
The Irish pharmaceutical maker's shareholders had a tough 2012. The general fears that surround name brand drug companies -- principally competition from cheaper generics -- seem to have weighed on the shares. Of course, the shares started the year with a sprightly P/E over 25, so there was already a lot of optimism surrounding the company.
Despite its sell-off in 2012 Shire's shares still ended the year with a P/E of 18, and while earnings are growing at a double-digit pace, I don't think many investors would call the shares cheap. The company will need to continue to drive growth in order to maintain investor favour.
The recently announced acquisition of Lotus Tissue Repair to bolster its genetic therapy pipeline was appreciated by the market, and the shares have enjoyed the general market rally since year-end.
Vodafone is the largest company on our list of losers, and in 2012 the giant telecom service provider suffered from European pains as consumers shopped for the lowest tariffs on their mobile plans and competitors proved willing to oblige.
Uncertainty about cash flows from Vodafone's 45% stake in American provider Verizon has also confounded investors, as what should be a healthy source of income hasn't been all that reliable to date.
Further pain was felt in December when the winning bids for new spectrum licenses in the Netherlands were higher than expected. If this is a sign of things to come then Vodafone's cash flows could be further pinched, which could threaten the dividend.
With the London Olympics in its backyard, temporary power and temperature control supplier Aggreko was set up for a banner 2012. Unfortunately, the Olympics only comes once every four years and the country's global operations didn't all benefit.
In its third-quarter announcements Aggreko revealed rising costs in certain markets and bad debts were going to crimp margins, and then its December trading update shocked investors with the announcement that the US withdrawal from Afghanistan and uncertainty in the Japanese market would reduce 2013 revenue by £100 million compared to 2012.
The result was a very painful last quarter of the year for investors as the shares fell nearly a third. Looking ahead, Aggreko is facing the same economic uncertainty everyone else is, but I think fears that next year's drop in sales marks a change in the company's growth trend are a bit overdone.
A sorry lot
This group of companies isn't exactly inspiring, but what would you expect from a bunch of losers? Some of their woes will only improve with rejuvenated economic conditions, while some could be addressed by a talented management team. In any case, success -- as always -- is not guaranteed.
We'll have to see what 2013 brings for these laggards -- if things break the right way, some of them could be next year's winners.
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