In some ways, corporate financial health behaves rather like our own. A company’s health may be good, it may be dragged slowly downhill by a concealed long-term malaise, a more obvious chronic ailment may affect it, an acute condition requiring more urgent treatment may emerge, or a major medical emergency or accident may require a blues-and-twos response and some form of life support.
The concealed long-term corporate malaise may arise from poor management, lack of response to changing markets and a failure to invest for the future. Where these shortcomings are substantial or prolonged, the symptoms of chronic financial illness may become more apparent through declining sales and profitability. Waning demand for a company’s core products or services is often the underlying cause.
Acute conditions that may affect a company’s finances can include situations where a major contract is lost unexpectedly, mass-produced goods are found to be defective by users and must be repaired or replaced, or where a competitor launches a far superior product and thereby grabs a huge chunk of market share. As for those rushed to A&E, the cause may be a physical disaster hitting the company’s operations or perhaps some form of financial irregularity that leaves a big hole in the balance sheet.
Quoted companies do not have immunity to these financial health problems and we can all probably think of some examples in each category. In most cases, the financial ill-health of a company is reflected in a substantial fall in its share price, due to fear either that it may not respond to treatment at all or that it may need the equivalent of a blood transfusion – an emergency rights issue that could water-down share values.
It is in this context that we often hear the expression ‘recovery stocks’, meaning shares that have fallen substantially in price when companies have hit hard times, but are seen to have some prospect of a return to good health. This sounds like a promising investment formula but it is important to remember that, in the way that sick people don’t always pull through, some ailing companies end up in the hands of liquidators.
One strategy for exploiting the opportunities presented by recovery stocks is to spread the risk across a number of companies, by investing through a specialist collective investment scheme. Its managers should also have diagnostic capabilities that few individual investors possess. But this is not an area for the risk-averse; the best approach may be to discuss the recovery fund option with your professional adviser to decide whether a holding would be compatible with your objectives and risk profile. We are here to help in this regard.
Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.
NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.