What investors can learn from Boart Longyear Ltd

What investors can learn from Boart Longyear Ltd

One of the many market clichés is the old ‘don’t try to catch a falling knife’ and as with many of them it very often rings true. The expression means that when a stock is falling, investors should avoid the temptation of buying it because there is usually a very good reason for its falls. The expression sounds contrary to the expression ‘buy in gloom’ – and it’s true that sometimes buying a falling stock can lead to the best gains – however, the point I’m making is that if you’re looking at buying a stock which is falling aggressively, buy it only if you’re confident of the quality of the business and its ability to rebound.

Boart Longyear Ltd (ASX: BLY) is a perfect example of what investors should try to avoid in the future. BLY is a market leading company (the world’s biggest drilling services provider) which many investors have held at times. In the last two years I have received many questions asking whether the falls would mark a good entry point, and it is a stock I always suggested should be treated with caution. My main concerns were that the company was holding a lot of debt which it had built up through the resources boom and its management had done a very poor job of reacting to its changing business environment.

Source: Rivkin Trader 

And now it seems as though BLY has reacted too late. A recent strategic review seems to have found no buyers, and the likelihood is that its debt now exceeds the value of its equity. Shareholders are most certainly done with the idea of propping the company up with anymore capital raisings and there is now a very strong chance that the company will go bankrupt if things don’t change immediately.

Shareholders who had bought BLY on the way down simply thinking the stock looked cheap are probably now kicking themselves. But the good news is that BLY is an excellent lesson to learn from, and a guide on which falling stocks offer a real turnaround opportunity rather than a value trap.

What lessons have you learnt from investing in shares? I'd love to hear about your experiences in the comments section below.


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