Are these 3 stocks deadly value traps or lively recovery plays?

The Motley Fool
Royal Bank of Scotland RBS logo
Royal Bank of Scotland RBS logo

A plunging share price is both an opportunity and a threat: an opportunity to buy into the recovery, the threat of getting stuck in a value trap. So which are these three stocks?


Royal mess

I hate to kick off on a negative note, but right now, Royal Bank of Scotland Group(LON: RBS) looks like a classic value trap. Its 10-year performance chart shows a share price that has pretty much flatlined since the financial crisis. Actually, 'flatlining' is putting a gloss on things. Its share price managed to fall another 43% over the last 12 months, and currently trades at 176p.

German banking disasters are throwing an uncomfortable spotlight on the sector once again, but RBS should avoid schadenfreude. Like Deutsche, it's also coughing up to US regulators, paying $1.1bn to settle lawsuits over claims it sold toxic mortgage securities to two American credit unions, with another 20 in the pipeline. It still has admirers, Jefferies calls it a hold with a 200p target price, but it continues to post losses (£695m in Q2), the William's & Glyn disposal is dragging on, falling interest rates are squeezing bank margins and Brexit uncertainty rages. Avoid the trap, even at today's apparently tempting valuation of six times earnings.

Rio with brio

Mining giant Rio Tinto(LSE: RIO) has rewarded contrarians this year, in stark contrast to RBS. Today's 2525p share price is up 60% from the low of 1577p it mined in mid-January. This year's commodity stock rebound has been a wonder to behold, lifting all boats. Buying good companies amid a market sell-off is a strategy we applaud at the Fool and certainly worked in this case (although as RBS shows, it isn't foolproof).

Rio chief executive Jean-Sebastien Jacques reckons metals are set to emerge from their "twilight zone", with copper leading the way, as Chinese demand recovers. He reflects a growing feeling that we've seen the bottom for commodity prices, and possibly China as well, although I remain concerned about the country's credit bubble and shaky shadow banking system. However, continuing global monetary easing should underpin Rio's recovery. Trading at 13.23 times earnings some of the value has gone, but the yield still excites at 5.67%.

STAN can

Investors in Asia-focused bank Standard Chartered(LSE: STAN) have endured a miserable five years, with the share price down 50% in that time. Yet the value trap seems to be easing, with the share price up 30% in the last six months. That makes now an interesting opportunity: should you hop on board in preparation for the next leg of the recovery?

You wouldn't buy it for the yield, currently just 1.51%. Nor am I convinced that China is set for a strong recovery. Standard Chartered isn't cheap either, on a forecast P/E of 33 while earnings per share (EPS) are forecast to be flat in 2016. However, EPS are expected to rise a stonking 133% next year, halving that P/E to a more amenable 15 times. Pre-tax profits should double from £1.1bn to around £2.1bn although that's mostly due to cost-cutting with forecast revenues flat at around £10.8bn. The value trap will eventually be sprung, but you should be prepared to give it several years.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.