Why I'd buy fast-growing Hurricane Energy plc over turnaround candidate Imagination Technologies Group plc
Apr 6th 2017 8:51AM
The fortunes of Imagination Technologies Group(LSE: IMG) and Hurricane Energy(LSE: HUR) couldn't be more different right now and that reflects in their share prices.
Those invested in tech firm Imagination Technologies have suffered a calamitous plunge of 62% or so since the end of March. The firm's largest customer, Apple declared its intention to abandon Imagination's intellectual property offering around 15 months or two years from now, so that will pull the rug from under around half the firm's current revenues.
Meanwhile, oil exploration company Hurricane Energy has delighted its shareholders with a more-than-450% uplift in its shares since April 2016 on the back of a successful oil exploration programme in the North Sea. The firm now thinks it could be sitting on "the largest undeveloped discovery on the UK Continental Shelf."
Whether you hold these firms' shares already, or if you are considering a new purchase, at every point in a stock's journey there is a decision to be made. At frequent periods, I reckon we should ask ourselves whether to 'buy', 'sell' or 'hold'.
However, one school of thought has it that if you don't rate a stock as a 'buy', it is by default a 'sell', and that's an opinion I'm increasingly drawn to in my own investing. Unpleasant things can happen to those that hold for too long, perhaps the most common of which is the dreaded share price reversal, which can cause once perky portfolio profits to evaporate.
Warren Buffett, Peter Lynch and other well-known successful investors built their fortunes by nailing down profits when they had them, not by holding on and on and on, despite what we often hear in the media. So if I was sitting on big profits with Hurricane Energy now I would probably take at least some of them by selling some of my shares.
When it comes to a decision to buy these firms now, the choice offers opposing characteristics. Is the most interesting company the one that has run into operational problems and needs to turn around its fortunes, perhaps with a new strategy? Or is the tempting candidate the firm demonstrating operational success and a bright outlook?
To be, or not to be contrarian
It's well known that many investors seem to gravitate to shares making new lows. When a company such as Imagination Technologies runs into operational trouble, the valuation can shrink and the shares can look like a bargain. However, Imagination has been relying on Apple for a long time and has been slow to build a more diverse revenue base. Now it looks like the firm may become embroiled in a legal dispute with its hitherto main customer. The situation looks messy and I think there may be risks ahead for shareholders.
The clear choice for me is to focus further research on the company that is performing well and on the share price that is breaking new highs to reflect that good operational performance, so Hurricane Energy tempts me the most. However, if I did decide to plunge in now and buy some of the firm's shares I'd remain vigilant and be prepared to sell at the first sign of things not turning out as expected.
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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of Imagination Technologies. 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.
Hurricane Energy