Of course, while a correction is painful in the short run, it could create buying opportunities for the long run. I think stocks such as Barclays (LSE: BARC) now appear to offer wide margins of safety, which could lead to improving total returns in the long term.

Clearly though, some cheaper shares may be worth avoiding due to the risks they face. One such stock released a trading update on Monday after a challenging period.

Uncertain prospects

The stock in question is Safestyle UK (LSE: SFE), the manufacturer and retailer of PVCu replacement windows and doors. It has experienced significant financial challenges in recent months, largely due to a weak operating environment. This contributed to a fall in its share price of around 50% in the last year.

But the company’s update also showed an improved sales order intake since its Commercial Agreement with its co-founder Mitu Misra was delivered in October. It has seen a substantial increase in its contracted workforce across its canvass, sales, surveying and installation operations. It has also invested more than expected in lead generation, commissions and associated overheads. These are due to benefit its performance in the 2019 financial year.

Despite the potential for improving profitability, Safestyle UK faces a challenging operating outlook. Spending on non-essential items is weak at present, and this situation could continue as the Brexit process continues. As a result, it may be a stock to avoid, in my opinion.

Improving outlook

The FTSE 100’s fall could mean, though, that there’s now a number of buying opportunities around. The Barclays share price has dropped by 24% in the last year as investors have become increasingly concerned about the outlook for the world economy. That’s unsurprising, since the threat of a global trade war and the possible impact of rising US interest rates could hold back the financial performance of global businesses.

As a result, the margins of safety on offer could be wider than they have been for a number of years. This could create buying opportunities for long-term investors – especially since global GDP growth is expected to be around 5% per annum over the medium term. This suggests that while there are risks, the underlying prospects for global stocks could be stronger than investors are currently anticipating.

Since Barclays has a price-to-earnings growth (PEG) ratio of 0.7, it appears to offer growth at a reasonable price. Although there could be further falls in its share price ahead, investors who are able to look at the long-term prospects for the business and the wider economy may be able to generate improving returns from buying while the stock trades at a low ebb. From a risk/reward perspective, the bank could be highly appealing despite the uncertainty that it faces.

The post Why I think the Barclays share price is an opportunity to play the FTSE 100’s weakness appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Barclays. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

But its tremendous record of growth came to a screeching halt in early 2017 as the bank issued an out-of-the-blue profit warning, leaving bullish investors, like myself, wrong footed. This, of course, is part and parcel of investing, and should be treated as an opportunity to learn where a thesis went wrong and how such an issue can be avoided again in the future.

For Provident, the issue was management’s move to end its relationship with its army of self-employed agents who covered a certain geographic area where they would have relationships with customers to whom they would extend credit and collect repayments. In their place, management sought to employ a percentage of these workers on an in-house basis and use a new computer system to improve the lending process and lessen regulatory risks from using contract employees.

On the face of it, this move made sense to investors like myself. However, things clearly went wrong when the new computer system proved to be not up to scratch and, more critically, many self-employed agents decided to not come in-house. That left Provident with large areas where no new loans were being made and existing loan repayments weren’t being collected.

What did I learn from this? First off, don’t underestimate the potential effects from any change to a company’s core business, even if it’s one that seems to make sense such as bringing field loan officers in-house.

Second is to make a more concerted effort to listen to what the employees of a firm are saying. In Provident’s case, there were plenty of agents complaining publicly about the changes before management was forced to issue its profit warning.

Competitive issues 

Another stock I was very wrong about was Safestyle UK (LSE: SFE), a large PVC window and door replacement manufacturer and retailer. The company’s first few years as a public entity went smoothly as it reported consistent sales and profit growth on the back of growing share of its highly fragmented market.

But this came to an abrupt halt last year with a shock profit warning. That turned out to be down to a rival operation setting up shop in Safestyle’s own backyard with a similar business model, branding and even many former employees.

What did I get wrong here? Well, the big problem was overestimating just how much of a moat Safestyle had to ward off competitors. The new competitor proved adept at producing and selling its products at a similar price point to Safestyle, which I had thought highly unlikely given the company’s vertically integrated business model.

There were several important lessons learned from this one. Ensure as much as possible a company’s competitive advantage is deep and lasting; pay closer attention to whether customer decisions are driven more by price or quality; and to take a look at a sector’s history, which could have tipped me off to previous problems in Safestyle’s market. 

The post Two stocks I was dead wrong about and what I have learned appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Back then the business, which manufactures and sells doors and windows in the UK, warned in a trading update that it expected profits in 2018 “to be materially below 2017 levels and current market expectations.”

It said that a blend of deteriorating consumer confidence and the emergence of an “aggressive” market entrant had damaged operations and that, as a consequence, orders since the turn of 2018 had “disappointed” and fallen shy of expectations.

To the cheer of income investors however, Safestyle said that its robust cash generation and solid balance sheet would see it pay a final dividend of 7.5p per share and so take the full-year reward to 11.25p, in line with the prior year.

The company made good on this vow today and City analysts at least expect the business to pay an identical dividend in 2018, even though earnings are expected to fall 15%. Safestyle subsequently carries a monster yield of 12.3%.

The bubbly predictions do not end here however, and the Square Mile is tipping the double glazing firm to flip back with a 13% profits rebound in 2019. And this leads to speculation that the dividend will improve to 11.4p, pushing the yield to an even mightier 12.5%.

But I’m not so sure that these predictions aren’t looking just a tad giddy.

Dividends on the rack?

Safestyle advised today that while the average unit sales price rose 7.6% in 2017, the number of frames it installed last year slumped 7.9% to 265,716. This pushed revenues 0.5% lower to £158.6m and this, combined with higher costs, drove underlying pre-tax profit to £15.1m, a 26.3% year-on-year slump.

The AIM-quoted business has a mountain to climb to turn around its bottom line. Although it is taking steps to cut the cost base and to improve turnover by modernising its sales teams, the tough conditions that caused profits to tank last year look set to persist for a whole lot longer.

And this puts dividends in danger in my opinion. Dividend coverage through to the close of 2019 ranges at between 1.1 times and 1.3 times, a country mile below the widely-regarded security watermark of 2 times and above. Meanwhile, cash on the books fell to £11m by December from £13.5m a year earlier, and the investments Safestyle is about to make to improve its processes will put even more strain on its balance sheet.

Despite its low forward P/E ratio of 7 times I believe the windows giant carries far too much risk to make it a sensible investment destination. The share  has lost 70% of its value over the past year and it is not difficult to foresee a further collapse, particularly if the dividend is put through the mincer.

The post Why I’d sell this dividend stock despite its 12% yield appeared first on The Twelfth Magpie.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Safestyle UK. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’ll come back to the other company in a minute, but first I’d like to explain why I think Safestyle’s forecast dividend yield of 11% is likely to be a trap you should avoid.

The game has changed

Market conditions may well be tough. But in its latest profit warning, Safestyle also complained about an “aggressive new market entrant”. Presumably this company is forcing down profit margins in the sector with lower prices.

However, it’s worth remembering how profitable Safestyle has been in recent years. In 2016, it reported an operating margin of 12% and a return on capital employed of 48.1%.

Those are very high figures, given that replacement windows are a fairly standard product. I’m not surprised that such high returns are attracting more competition.

The company is safe, but the dividend isn’t

There doesn’t seem to be any immediate risk that Safestyle will go bust. The group reported net cash of £17.7m at the end of June last year, and says that its operations remain cash generative.

But 2018 results are expected to be “materially below 2017 levels”. I expect margins to fall, as market conditions remain competitive.

Current forecasts suggest that earnings could fall by 10% to 12.8p per share in 2018. That leaves very little cover for the projected dividend of 11.3p per share. In my view, a cut is likely. I’d look elsewhere for income.

Try this for size

If you’re attracted to the homebuilding and construction market, you might want to consider Eurocell (LSE: ECEL). Like Safestyle, this door, window and roofline product firm is vertically integrated. In other words, it manufactures and retails its own products.

Eurocell only floated in 2015, when it attracted big name backers including fund manager Neil Woodford, whose funds have a 15% stake in the firm.

The group’s 2017 results suggest performance remains stable. Sales rose by 10% to £224.9m last year, while adjusted pre-tax profit rose by 1% to £24.5m. Adjusted earnings per share were 2% higher, at 20.44p.

Shareholders will receive a total dividend of 9p per share, a 6% increase from 2016. My calculations suggest this £9m payout should be covered comfortably by last year’s free cash flow, which I estimate at £14.5m after acquisitions.

The way forward

Like Safestyle, Eurocell benefits from good cash generation. Net debt fell by 28% to £14.5m last year, despite the firm investing in 31 new branches. This Alfreton-based company now trades from 190 branches, but the recent rapid pace of growth seems likely to slow.

Chief executive Mark Kelly says that the firm’s focus in 2018 will be “on optimising our branch network” and “expanding further our recycling capability”.

Although “challenging” markets and rising prices for raw materials remain a risk, analysts expect earnings to rise by 10% to 22.4p per share this year. The dividend is expected to rise by 9%. These figures put the stock on a 2018 forecast P/E of 9.5, with a prospective yield of 4.5%. In my view, this could be one of the best buys in this sector.

The post Why I’d avoid this 11% yielder and buy this Neil Woodford stock instead appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Safestyle UK. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

On the personal side, I once asked for a quote to glaze a whole house, and I suffered one of the worst hard-sell experiences of my life — followed by persistent phone calls after I’d said no.

But on the investment side, I can’t help but be impressed by years of rising earnings and a strongly progressive dividend yield. Forecasts for 11.25p per share for the current year would provide a yield of 7.4% on Tuesday’s close.

But as I write today, the share price has crashed by more than 20% to 116p, after the company issued a profit warning. Safestyle has confirmed its intention to pay that big divided for the year to December 2017, saying it has a “a strong cash position and robust balance sheet,” and it would yield a massive 9.7% if you bought the shares today. But its sustainability must surely be in doubt now.

Profit warning

Saying that it has experienced “a continuing deterioration in the market resulting from declining consumer confidence,” and that “an aggressive new market entrant” has tightened the competitive screws, the company warned us that 2018 orders have been disappointing.

Underlying pre-tax profit is expected to be “materially below 2017 levels and current market expectations.” Forecasts were already indicating a 30% drop for the year just ended, so I’m expecting 2018 predictions to be significantly downgraded now.

The company does say it has reduced its cost base and has “carried out the planned restructuring of its sales and canvass functions,” but I can’t see that turning things around quickly.

In the current economic climate, Safestyle UK is one I’d avoid.

Reliable yield

For a safer dividend, set to yield 6% in 2018, I’m attracted to Standard Life Aberdeen (LSE: ADN). I’d already been impressed by Standard Life and Aberdeen Asset Management, the two parties to the merger in August 2017, and I see an interesting future.

How that future will look financially is hard to work out right now, after the firm announced plans to sell the majority of its insurance business to Phoenix Group — though Standard Life Aberdeen will continue as asset manager for the divested business. It might take a little while for the markets to get their heads round that one.

The progressive dividend records from the company’s constituent parts have been impressive, and forecasts for the combined firm suggest rises significantly ahead of inflation for this year and next. Cover by earnings might look a bit thin at around 1.3 times, but I’m not too troubled by that.

Cash

Standard Life Aberdeen remains strongly cash-generative, and it’s just lifted its 2017 full-year dividend by 7.5% — I’d say the confidence appears to be there for future cash prospects.

My key take from Standard Life and Aberdeen Asset Management over the years is that they have both been good examples of buy-and-forget investments, and whatever structural changes have happened over time, those who bought for the long term have done well.

Managing sizeable chunks of retirement assets, the company surely has to continue to look to long-term retirement outcomes which will provide for years of future income draw-down.

I think Standard Life Aberdeen will do well for its customers, and possibly even better for its shareholders.

The post A 6% FTSE 100 dividend stock I’d buy today, and a falling knife I’d avoid appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Safestyle UK and Standard Life Aberdeen. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Thankfully, there are still a few stocks on the LSE that appear to me to be trading at prices well below what they should be. One is domestic retail bank Virgin Money (LSE: VM), which trades at just 0.81 times its tangible book value, far below the sector average of 1.17.

The main cause of investor unease towards the challenger bank is the growing worry that domestic economic growth is looking dangerously close to petering out. For a purely domestic retail bank such as Virgin Money, it’s easy to understand why this would be a problem.

Yet with the economy still defying negative prognostications I believe Virgin Money appears quite attractively priced for what is a fast growing, low-cost, highly profitable lender. In the first nine months of 2017 the bank grew its mortgage lending balances by 10% year-on-year to £32.9bn while taking its market share of gross mortgage lending to 3.5% during the period.

At the same time, it is also gaining market share in the credit card sector and attracting more customer deposits. Together with an operational structure that is much leaner than larger rivals, increased lending is leading directly to improved profit metrics. In the first half of 2017 the bank’s return on tangible equity increased from 12.2% to 13.3% and underlying pre-tax profits leapt to £128.6m.

With a stable capital position, these growing profits are sufficient to both invest back in growing the business and rewarding shareholders through a rising dividend that analysts expect to reach 5.725p for the full year. While this only represents a 2% yield at today’s share price, there’s still plenty of runway for management to continue boosting returns, especially as interest rates rise and increase lenders’ profitability.

An opportunity in others’ misery

While Virgin Money continues to power on, slowing consumer confidence in the housing market means profits are being knocked at replacement window and door manufacturer Safestyle UK (LSE: SFE). Over the past half year, the company has had to issue two profit warnings as consumer demand has begun shrinking, leading analysts to predict full-year earnings per share of 14.39p for 2017, against 20.33p for the year prior.

However, even with this lower level of earnings, Safestyle still trades at just 11.6 times earnings while kicking off a whopping 6.7% dividend yield that should be safe as its mounds of cash can cover outsize dividend payouts for some time. This looks to me an attractive price point for the business as it continues to grow and can actually use this market-wide downturn to its advantage by taking its cash-rich balance sheet and lower-cost-of-production facilities to accelerate market share consolidation in its very fragmented market.

Indeed, since the beginning of the last recession in 2007, the firm has more than doubled its market share from 4.4% to 11.2%. This process should continue as Safestyle expands into the wealthier southeast of England and pushes out weaker players thanks to its financial heft.

Investing in Safestyle now may not be for the faint of heart, but long-term investors could find this a tempting time to begin a position in a highly profitable, fast-growing market leader.

The post 2 top value stocks I’d buy in 2018 appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Safestyle UK. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Difficult trading conditions

The update Wednesday showed that there has been a further deterioration in trading conditions. This is largely due to declining consumer confidence, which has contributed to a fall in the value of the company’s sales of 0.3% in the three months to 30 November. This means that in the 11 months to 30 November, the company’s sales by value are 0.8% lower than for the same period in 2016.

As well as weak sales, the company has seen increased costs in acquiring new customers. This means that its profitability for the current year is expected to be lower than current market expectations. It also expects market conditions to be tough in 2018, and in response it has lowered its expectations for performance next year. Although it is seeking to reduce costs and become more efficient, the outlook for the business appears to be downbeat.

Of course, Safestyle’s performance is unsurprising. Higher inflation means that consumers simply have lower disposable incomes in real terms. This means that the purchase of non-essential items such as new windows and doors is being postponed until a later date. With the outlook for the UK economy being uncertain and inflation expected to remain ahead of wage growth in the near term, the situation for the company could get worse before it gets better. As such, now may be the right time to sell it.

Turnaround potential

However, not all consumer stocks may be worth avoiding at the present time. Sports Direct (LSE: SPD) is a company which could benefit from a squeeze on consumer confidence. It focuses on offering value for money and was a strong performer in the financial crisis. This means that it could see demand for its budget proposition increase, which may help it to deliver a successful turnaround after a difficult period.

Looking ahead, Sports Direct is expected to deliver a rise in its bottom line of 42% in the current year. It is due to follow this up with additional growth of 13% next year. Despite this strong rate of growth, the company trades on a price-to-earnings growth (PEG) ratio of just 1.7. This suggests that it could offer a wide margin of safety as well as strong share price growth.

Certainly, the company has been the centre of criticism from various politicians and the media in the last couple of years. However, it seems to have a good underlying business model which may be well-suited to the challenging outlook for the UK economy.

The post After 20% crash today, I’d sell Safestyle UK plc for this turnaround stock appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Safestyle UK and Sports Direct International. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Well, the problems the company faces are very real. First up is the steady decline in letter usage that is almost assuredly going to continue indefinitely. In fiscal year 2017 letter volumes shrank 6% year-on-year (y/y) and revenue fell 5% to £4.3bn.

However, the company is making up for the decline in letter usage by shifting resources into parcel shipping and this business is booming thanks to e-commerce. Last year, parcel revenue rose 3% y/y to £3.3bn in the UK and European operations recorded a 9% y/y revenue uplift to £2.5bn. While this is a fiercely competitive market, even if the company only grows sales slightly ahead of the market it will be hugely beneficial for the bottom line.

Management is also in the midst of a dramatic transformation programme that involves trimming operating costs, investing in more efficient sorting facilities and selling off high-priced London real estate that isn’t being fully used. The positive effects of this programme are now beginning to pay off with earnings per share last year rising to 27.5p from 21.5p and cash flow rising substantially.  

That said, prospective investors should be cautious right now as the company is embroiled in a fierce fight with unions over phasing out its current defined benefit pension scheme. From an investor perspective this makes sense as management expects costs related to funding annual pension payments to rise from £400m to over £1bn in the coming years. But with the workers’ union threatening a strike, I’d wait to invest in Royal Mail until both sides come to an agreement and its financial effects are made public.

A falling knife to catch?

Another high-yield stock that’s been battered recently is replacement window and door manufacturer Safestyle (LSE: SFE), whose share price is off by over 25% in the past year. This has been caused by a couple of profit warnings due to falling consumer demand across the industry earlier this year.

However, this problem hasn’t affected its ability to pay out a dividend that analysts expect to yield 6.6% this year. In fact, although H1 earnings per share fell 11.7% to 8.3p, this still safely covered the interim dividend of 3.75p. And with operations still generating impressive cash flow and net cash of £17.7m on the balance sheet, the full-year dividend in the 11p range should be very safe indeed.

This industry-wide downturn is also a blessing in disguise for Safestyle. The company has a major leg up over competitors from owning its factory, which significantly lowers costs and lead times for getting new products to market. This means it can sacrifice on pricing and temporarily reduce margins to take market share from competitors, something it has done very successfully before. Safestyle isn’t without risks but its healthy yield, bundles of cash and attractive valuation of 11 times forward earnings has me very interested.

The post 2 bargain basement turnaround stocks offering 6%+ dividend yields appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Safestyle UK. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Good figures, but…

The underlying figures look good with revenue ticking up 5% and earnings per share moving 7% higher. The directors pushed up the full-year dividend by 5% “reflecting the board’s confidence in the group’s prospects”.

However, I’m wary of construction companies as a breed.  We’ve seen in other firms with construction operations, such as Galliford Try recently, that it can be hard for them to stay consistently profitable. There’s always the potential for a firm like Kier to mess up in the tendering process or during the execution of a project. So I’m inclined to ask why take the risk by investing in the sector at all?

Kier says that its two-year simplification programme is “substantially complete”. The weakness in the price of the stock over the past three years or so was not without reason. The company needed to reshape operations to stand any chance of growth and there’s a £75m charge against reported profits relating to the closure of operations in Hong Kong and the Caribbean, and following the sale of Mouchel Consulting.

Big revenues, small profits

A little under 50% of revenue came from the construction division and 40% from services such as strategic asset management, housing maintenance, facilities management, environmental services, refuse collection, recycling, highways maintenance, street lighting, fleet services, waterways management, and energy solutions provision. The Construction and Services order books stand at around £9.5bn providing “good long-term visibility of future workload”.

The directors say they are “Confident of achieving double-digit profit growth in FY18,” but I reckon the big revenue numbers involved in the construction and services operations, and the relatively small numbers for profit in those two divisions, don’t leave much room for error. So, I’m avoiding the shares.

Sudden downturn

Meanwhile, Safestyle UK (LSE: SFE) also appears to have delighted the market today with its interim results. The shares are up around 8% as I write. But I reckon the market’s reaction could be one of relief that trading for the double-glazing and door installer is not as bad as feared, rather than joy that the business is growing. After all, even at today’s 200p, the shares are down around 37% since May.

In the face of a sudden downturn in the market, which the company reckons is the severest since 2008/09, the firm managed to grow revenue by 1.4% compared to a year ago. But the progress came at the expense of margins with underlying profit, before tax, plunging a little over 15%. The directors held tight by declaring a flat interim dividend. At least there’s no cut in the payout – yet.

Safestyle has just demonstrated its reliance on buoyant economic conditions to thrive. If the economy plunges, Safestyle could have much further to fall and doesn’t square up as the kind of secure dividend investment I’m looking for.

The post 2 big-dividend stocks that could send you to the poorhouse appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Safestyle UK. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

It’s the group’s second profit warning in two months and looks serious to me.

In an accompanying statement, Safestyle said that the group’s order intake has fallen faster than expected since July. As a result, management expects to see “a material impact on full year profits”.

Is there any good news?

However, there doesn’t seem to be any company-specific issues here. Safestyle is the market leader in its sector and has been highly profitable and cash generative over the last few years. It’s also worth noting that the company reported a net cash balance of £13.4m at the end of last year, with no debt. So it seems unlikely to experience financial distress.

The problem appears to be a reduction in consumer spending. According to the latest statistics from trade body FENSA, the company noted installations of replacement doors and windows fell by 18% in June and July, compared to last year.

As a result, full-year revenues are now expected to be flat on last year, while profits are expected to be significantly lower. This is a big setback, considering that analysts’ forecasts until today were showing profit growth of about 11% this year.

After today’s fall, I estimate that this stock trades on a P/E of perhaps 10. There was no word on the dividend in today’s news, but if it’s not cut it would offer a yield of 7%. However, I suspect the shares will get cheaper before they start to recover. I’d stay away for now.

Is this the next big profit warning?

Car dealership group Cambria Automobiles (LSE: CAMB) recently reported a 21.7% rise in underlying half-year profits. It appears to be well financed with strong free cash flow, and trades on a forecast P/E of just 7. So what’s the problem?

Cyclical stocks like this often look cheapest when they’re near the top of the market. These low P/E ratios are common when the profits are close to a peak, and the market is pricing in a downturn.

In my view, there are several reasons to be cautious about investing in car dealers. UK new car registrations fell by 2.4% during the first eight months of the year, and by 6.4% in August alone.

According to Cambria’s latest trading statement, the group’s own like-for-like new vehicle sales fell by a staggering 17.6% during the 11 months to 31 July. It seems clear to me that the market is weakening.

I believe that’s why most of the major car manufacturers have now rolled out scrappage and ‘deposit contribution’ offers. Essentially, these are just sales tools to encourage owners of older cars to trade up and buy a new car, rather than another used one. Their purpose is to boost volumes at the expense of lower profit margins.

Although car dealers make most of their profits on aftersales and used cars, if new car sales fall, the pipeline of future aftersales work will shrink. In my view, now is not the right time to put money into this sector, however cheap it might seem.

The post Is this value dividend stock a falling knife to catch after dropping 25% today? appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of Cambria Automobiles. The Motley Fool UK has recommended Safestyle UK. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.