More turbulence on the Stock Market (June 2008)What a roller-coaster! The Yell shares that jumped 25% almost immediately after being purchased are now down 39%. How could such a dramatic change around occur? Recall that they had fallen the most of all FTSE companies over the year to March 08 and I had bought them on the basis of value given that at the much lower price they were yielding 11.1%. And that high yield gives us the answer. After the dramatic recovery from the low spot, the directors announced a cut in dividend thus destroying at a stroke the rationale for an investor to move back in. It is the reason given for the cut in dividend that precipitated the further and dramatic fall in the share price. The prospects look less certain and cash has to be preserved. So what will happen next? Yell remains a large and successful business with increasing emphasis on digital advertising growth as distinct from the hard print Yellow Pages. Even so with its strong presence in USA as well as UK the market is obviously worried. Is it worth “averaging down” or would I be catching a falling knife? My decision is in the pending tray.
Turning to Taylor Wimpey, I decided over the past month to average down and doubled my shareholding at a considerably lower cost than the disastrous first investment. This brought my average purchase price down to £1.29 a share. The trouble is that I did not find the bottom of the market and the shares continue to slide notwithstanding good press about certain large global investors possibly coming to the rescue and the speedy decisions by management to cut costs (it was reported that 13 regional depots have been closed). As I write this article, the shares have dropped to 66.5p (a year ago they were £4.26) and yield an unbelievable 23.7% on a PE of 2.2. What are the odds on a dividend cut as per Yell? My holding is down 41% notwithstanding the averaging down.
Last month I boasted about my success in breaking even on Sterling Energy after an averaging down exercise. The price I needed the shares to reach was 14p. Now look what has happened. They have slipped back to 11.75p so that I am in negative territory again. However it remains a good business story and I am confident that once the markets as a whole settle down, this margin will be restored.
Meantime I have been running to cash with my successful investments until this woeful early summer has passed. More of this next month..
jgs-2008
