LON:CLLN | Carillion - I'm Caught In A Value Trap, What Next?

22nd Jul '17 by Silver Moon

11 comments 6477 reads

Having held Carillion shares long term and averaging down when it seemed the right thing to do I'm beginning to think the shorters have got the upper hand of this company. I had a similar but less of a problem with Balfour Beatty and finally got out of the value trap which existed there. I ask, would it be better to cut and run or stick with Carillion?

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About the Author

Silver Moon

Premium Member

Male, born in 1944. A saver who abandoned high interest cash accounts for equities when the bottom fell out of the interest rate. My mother's investment plan was to turn over the silver coins in her purse at the full moon, hence my moniker. more »

11 comments

Howard Adams

22nd Jul '17

Hi Silver Moon

You might like to read the Stockopedia's research into profit warnings.
http://www.stockopedia.com/books/profit-warnings/

Or ED's video which explained the research and results.
https://www.youtube.com/watch?v=YayTZn4c7I0

Another perspective is offered by MoneyWeek this week. John Stepek writes (page 10) ... if you had bought Carillion (LON:CLLN) on Friday 7th July you would have a paper loss of 70%. But he points out that the share would need to climb by 230% to get back to even.

Personally, I value the SP profit warning lessons and exit rapidly on uncomfortable share price drops. Also, I think about the percentage climb a share needs to make to get back to even. These lessons sit on each shoulder when I try to decide to exit and have proved useful to me.

Regards
Howard

vik2001

22nd Jul '17

my rules are:
only buy on positive news/trading updates
never average down.
20% stop loss at max. I may exit earlier if i feel stock is going downhill.

if I was you cut your losses and move on from this stock.

ricky65

22nd Jul '17

I agree with Howard and vik

Howard correctly mentions that losses work geometrically against you. e.g. 50% loss requires a 100% gain to break even. A 90% loss requires a 900% to break even. How many stocks can you think of that have gone up 900%?

I agree with vik on never averaging down. I think of the picture of Paul Tudor Jones with "Losers average losers" on the wall in the background.

Also Jones says to sell a stock if it goes below the 200 day moving average. I note that £CLLN has been below the 200 since 09/2015.

JohnEustace

22nd Jul '17

Imagine you have sold up and are now looking for the best place to invest the proceeds. Would you buy back in to Carillion or would you invest elsewhere?

talepine

23rd Jul '17

Personally I would caution buying this share at the moment as the market concencus seems to think they will be needing cash any time soon which will mean a rights issue offering shares at a discount to whatever they will be at that time....they will normally fall to match the discounted price....I have been thinking of buying since the drop but will wait a while yet.

jjis

24th Jul '17

I'd suggest selling into the current rally to avoid the likely rights issue / refinancing dilution - unless you want to put more money into Carillion again? Then most importantly don't forget to not buy low margin contractors again - twice bitten, thrice shy.

aflash

24th Jul '17

Investment is about managing losses.

All important writers underline this.

While Howard Adams, vik2001, ricky65 point the way forward, what do you do as a holder?

John Esutace and talepine give some ideas to which I would add the following:

RBC Capital markets has a price target of 100p and Morgan Stanley 260p. They are considerable improvements on today. The shorters have to cover more than they have already.

If you accept that you will make a loss, How Much will you lose?

Personally I have done OK with Rights Issues in the past. That is because I am rarely fully invested and have substantial cash balances on hand. OK here means losing less.

In this particular case I sold out at 2,03 in May, following the rules laid out by Posters above. However the profit warning price seemed cheap so I bought some more and am holding.

It is a large company and employer of Brits. Its contracts may not be profitable but most will be paid. I survived BBY and IRV. My exposure is small so if Insolvency is sanctioned it will a 100% loss of not much.

Remember GLEN? A different sector, the point being they said it was worthless and look what hapened.

CLLN may drop to 30p and I may buy more on capitulation............

Howard Marx

24th Jul '17

Certainly true aflash that, less than two years ago, some City 'experts' estimated that the Equity of Glencore & Anglo American may well be worthless.

In hindsight, they clearly got it very wrong.

Worth remembering this event when deciding how much weight to put on ' RBC Capital markets has a price target of 100p and Morgan Stanley 260p'.

(!)

ricky65

24th Jul '17

I actually think managing losses is the most important part of investing.

It's not just monetarily damaging, but psychologically damaging. In my early investing before I used stop losses, I found that the bigger the loss, the more psychologically difficult it is to decide what to do next.

I find it cathartic and a weight off my shoulders to sell at a small loss when my stop is hit (though large gap downs will always annoy me!); I found losers drain energy which is better spent elsewhere.

Bushranger

27th Jul '17

Good point regards the psychological impact on a persons investing. Loses leave me like a stunned rabbit.

TangoDoc

28th Jul '17

I hate to sell at a loss at any time so stop losses have always been problematic for me, particularly as I have no real need to sell. As long as a company continues to send me a dividend that exceeds anything I can get elsewhere, I tend to hold. Besides, with a well diversified portfolio, including enough winners to balance up, I can wait for a turnaround until the cows come home. Having said all that, the sense of relief I felt once I had sold my holding in Carillion was very enjoyable, as was watching the price continue to descend. I will keep an eye on the company because it should come back but, being more than adequately exposed to this sector already, it will have to be only after significant evidence that the management have learned their lesson. Meanwhile, my residual equity is cosily in a dry lifeboat elsewhere.

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Carillion - I'm caught in a value trap, what next?

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Silver Moon

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