The ink was barely dry on last week’s article when another SIF folio stock was hit by a massive sell off. The culprit this time was FTSE-listed car dealership group Lookers, which shocked the market with news of an FCA investigation.

I’m going to cover this news and then take a look at mining services group Capital Drilling. Is this a suitable stock to replace last week’s departure, Sylvania Platinum?

Dealer profits could suffer

LOOK shares fell by about 25% last Tuesday, as Paul reported here. The subject of the investigation is the firm’s regulated activities between 1 January 2016 and 13 June 2019. 

I think the main risk this flags up is that dealers’ profits may have become too dependent on big commissions from finance and insurance products. One estimate I’ve seen suggests that around a third of the profit on each car may have come from financial products.

In its 2018 annual report, Lookers flagged up a contingent liability in this area, warning that it had identified “certain matters requiring review” in its regulated activities. However, at the time, the company said it wasn’t yet practicable to estimate the potential size of any financial liabilities that might arise.

I don’t have any insight into this situation. My rules allow me discretion to sell in situations like this. But when I’ve done so in the past, I would often have done better to sit tight. Stocks hit by regulatory news sometimes recover strongly when more information becomes available.

Lookers only joined the SIF fund in March, but the fund’s position is now down by 50%. It’s not a great start, but the stock is still scheduled to spend at least six more months in the portfolio. Until we have more concrete information -- or a formal profit warning -- I’m inclined to sit tight and await further developments. I won’t be selling Lookers for now.

Mining opportunities?

I have had some good investment results with mining stocks over the years and maintain an ongoing interest in this sector. However, I do have some ground rules. 

Mining companies must have a profitable business model, a proven track record and a sound balance sheet. As a general rule, I also prefer dividend-paying companies. I believe this provides useful evidence of cash generation and boardroom…

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