Can investors expect slumping stocks to bounce back? The obvious answer to this question is, it depends which stocks, and why they slumped. Share prices fall for many reasons. Some remain unloved, cast aside by equity markets like sodden paper bags. Others recover, fixing perceived problems and re-emerging from the equities’ emergency room.

Digging around the debris of past disasters is what so-called value investors do, hoping that their industrious rummaging will unearth a company on the mend, and a share price with significant recovery potential.

Doing this successfully is not a simple process.

Shares thought it would make an interesting exercise to skim through some of the stocks that have been highlighted in our Down in the Dumps slot in recent months.

WHAT ARE DOWN IN THE DUMPS STOCKS?

We use the section to regularly scan markets to highlight company share prices that have fallen sharply and attempt to unravel why. There is no formula as such, rather we try to find stories that may be interesting to readers, and maybe, and this is what we hope to discover here, if the featured stocks hold much hope for a turnaround worth backing early.

We felt it would be most instructive to study companies that have featured reasonably recently yet have had a decent amount of time for any recovery to take hold. For this reason, we are concentrating on the 13 stocks to feature in our online magazine between the beginning of July and the end of September 2023.

As you can see from the accompanying table, it is an eclectic list of financials, consumer goods and services providers, commodities suppliers, and retail businesses, drawn from both sides of the Atlantic.

DOGS WITH EXTRA FLEAS

Perhaps what stands out most obviously is that featuring in the Down in the Dumps section can be a pretty good warning flag that further declines are likely. Six of the 13 shares have racked-up double-digit falls since being featured, with Vanquis Banking (VANQ) and Pod Point (PODP) posting particularly ugly performance.

For Vanquis, getting kicked out of the FTSE 250 index in August 2023 would not have helped its cause (which we warned could happen), it would have seen funds that invest specifically in UK mid-caps sell their stakes.

Arguably, more important, is the old Provident Financial’s attempt to change its spots. As we said at the time, shifting away from higher-risk, poor credit borrowers to a more mainstream, lower credit threat provider was never going to be quick or easy.

‘A lender doesn’t change its whole loan book overnight and investors are clearly worried about Vanquis’ long-tail of higher-risk borrowers, especially with interest rates seen staying higher for longer’, is what we explained. Add in a questionable lending reputation – it had been accused of handing out unaffordable loans to cash-strapped borrowers – makes for a toxic mix that has seen thousands of investors sell the shares and move on.

Clearly, the timeframe under review is too short to draw long-run conclusions and perhaps sweeping management and operational changes may come good in time.

Electric vehicle home-charging operator Pod Point is an entirely different story, albeit, with a similar short-term outcome. Shares expressed reservations about the investment opportunity two years ago based on its lofty valuation, limited visibility on its road to profit and a competitive marketplace.

As is often the case with start-ups, dragging Pod Point into profit is taking longer, and the road has been far bumpier than initial hopes. Results for the six months to 30 June (31 July) suggested the company is no closer to achieving profitability, while ‘a drop in revenue of 26% to £30.6 million saw its net loss widen by 337% to £33 million with cash on the balance sheet falling from £74.1 million at the start of 2023 to £58.8 million’, as we explained.

There is hope, of course. Electric vehicles are hitting UK roads in ever greater numbers and drivers will need a home recharging set-up to fuel their Teslas and Toyotas. Many may choose Pod Point down the line, which could create a nationwide empire of recurring revenue units. But there are also well-funded rivals and more will come.

OUT OF THE DOGHOUSE

Successes are fewer and further between, with online holidays firm On the Beach (OTB) the standout here after a 30% share price rally since being featured as a Down in the Dumps stock more than three months ago (3 August). Investors had been concerned about the firm’s substantial marketing splurge, where it had backed top TV shows like ITV’s The Masked Singer.

Yet management’s expensive decision to throw money at seeding demand paid off. In September, the company reported summer 2023 passenger numbers 11% ahead of 2022 and winter bookings 26% higher, prompting news that profits in the year to September 2023 would be ahead of expectations, the sort of announcement investors never tire of.

LESSONS LEARNED

So, what have we learned from this exercise? Perhaps that following the Down in the Dumps section has some merit. It can alert readers to companies in trouble, and sometimes offer a hint to whether change is likely. It can also throw up warnings that some stocks are in the mire for a good reason, and that they should probably be avoided for the foreseeable future.

But chiefly, that this is a relatively small sample size and that it usually takes longer than a handful of months for companies to demonstrate genuine recovery. This may mean deeper investigation could offer new pointers and we may take on a similar exercise in future using a larger sample size and time frame to see.

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