Warren Buffett once said that he likes ‘buying quality merchandise when it is marked down.’ Many of his investments have been in profitable, cash generative companies with strong brands, but were often trading at cheap bargain prices when he brought them. Stockopedia’s framework for classifying shares would categorise these investments as ‘Contrarian’. They have high Quality and ValueRanks, but typically have weak price momentum.

Until very recently, Playtech, one of the UK’s largest online gaming providers, fell into the ‘Contrarian’ category of stocks. The firm has now been reclassified as a ‘Value Trap’. These stocks tend to have weak price momentum and they may cheap for a reason - for example, they may have a deteriorating financial situation.

As Playtech has only just been reclassified, it is still uncertain what the correct classification for this company is. Its share price has fallen by around 46% over the last year. It has cheap valuation metrics (eg. a low PE ratio) and historically the company was both profitable and cash generative. What remains unclear is whether the firm will be profitable as we go forward. If Playtech remains cheap, but its financial situation deteriorates, then there’s a risk that Playtech could indeed be a Value Trap.

In order to explore whether Playtech is a contrarian play, or a value trap, we need to understand why its share price is falling in the first instance…

Why is Playtech’s share price falling?

Playtech’s share price is falling as more online gaming providers have entered the market and its profits are suffering as a result. The company has issued two profit warnings over the past year. On 2nd November 2017 a trading statement explained that ‘Playtech has seen a recent slowdown in certain parts of Asia due to recent changing market conditions.’ On 2nd July 2018, another trading statement noted that:

‘average daily revenue in Asia continues to be impacted by an increasingly competitive backdrop. Towards the end of the first half, this market has seen a particularly aggressive pricing environment from new entrants to the market and this has impacted revenue.’

Would contrarian investors like Warren Buffett see Playtech as an investment opportunity? To answer this question fully, it may help to take a look at one of the investments that Buffett made back in the 1970s…

Buffett often brought stocks which had been marked down as a result of…

Unlock the rest of this Article in 15 seconds

or Unlock with your email

Already have an account?
Login here