Actions in an insurance and vacation company over 50 years old Saga (LSE: SAGA) have recently underperformed. When I last covered the stock in June, the stock price was close to 450p. Today however, it is at 275p.
So why has the Saga share price fallen in recent months? And did fall create a buying opportunity for me?
Why the Saga share price has fallen
In my opinion, there are several reasons why the Saga share price has fallen. One concerns concerns about Covid-19. Recently we have seen an increase in the number of cases across Europe and as a result a number of countries have reintroduced lockdown measures.
This had an impact on sentiment towards travel stocks. Just look at the stock prices of Carnival, easyJet, and AGI – all of them have taken a recent hit.
Another problem is that the group S1 results for the six months to July 31, posted in September, were a bit disappointing in some areas. On the retail brokerage side, for example, the group recorded only 0.5% growth in auto and home contracts sold. Maybe investors were looking for a higher level of growth here. It should be noted that last year’s annual results show growth of 1.1% in this segment.
A third problem is the lowering of brokers’ price targets. Credit Suisse analysts last month cut their Saga share price target to 423p from 471p. This type of negative broker activity can impact a company’s stock price.
Finally, it seems that the market has not appreciated the terms of a recent bond transaction. At the end of June, Saga announced that it would issue a £ 250million fixed rate bond at an interest rate of 5.5%. After the details of the bond transaction were announced, the share price fell significantly.
Should I buy Saga shares today?
Looking at Saga stocks today, they look interesting from a value investing perspective, in my opinion.
Right now, the consensus earnings per share forecast for next year (ending Jan.31, 2023) is 60.7p. This means that at the current share price of 275p, the prospective P / E ratio is only 4.5. It seems very weak. If the performance of the company improves, this assessment could turn out to be a good deal.
One person who clearly sees the value here is President Sir Roger De Haan. Regulatory documents show that on November 16, De Haan purchased 341,415 Saga shares at a price of 293 pence per share. This trade cost the insider just over £ 1million. I see this director’s trading activity as quite bullish. This suggests that the president is confident in the future and expects the share price to rise from there.
However, one problem that I personally have is cost effectiveness. I like to invest in very profitable companies. Diageo and Microsoft are examples of very profitable businesses. These types of companies can reinvest their profits and generate additional growth, by harnessing the power of capitalization.
Traditionally, Saga has not been very profitable. Even before Covid-19, its return on capital employed was very low.
Considering the low level of income here, I will keep Saga stocks on my watch list for now. I think there are better opportunities in the stock market for me today.
Teresa Kersten, an employee of LinkedIn, a subsidiary of Microsoft, is a member of the board of directors of The Motley Fool. Edward Sheldon owns shares of Diageo and Microsoft. The Motley Fool UK recommended Diageo and Microsoft. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.