When cheap shares go badly wrong!

As I get older (I’m 55 next month), I find it easier to admit when I’m wrong. For me, it’s not making mistakes that’s the problem, it’s how you deal with them. Also, they say confession is good for the soul. So here are two cheap stocks I bought last year that soon turned into complete howlers.

When cheap stocks go bad

1) Persimmon plunges

The biggest mistake of 2022 is buying cheap shares of famous British housebuilders persimmon (LSE: PSN). At the end of July, my husband bought this FTSE 100 Save for our family portfolio to generate huge dividends. Unfortunately, Persimmon’s double cash yield soon turned into a double price drop.

After Persimmon shares have fallen sharply from their 2021 high, we bought this stock at 1,856p. The share price is now at 1,418p, down 438p from the purchase price. That lost almost a quarter (-23.6%) in about six months. Ouch.

In a post-mortem to assess what went wrong, I remember that very high dividend yields are rare. Often, the stock price falls or the dividend is reduced. The next dividend payment on Persimmon Corporation shares has been published on 03/23/2020. However, I expect to collect less than half of that. Ouch.

Persimmon shares are down more than two-fifths (-40.6%) over the past year and may be hit harder by rising interest rates and shrinking disposable incomes. But we’ll hang on to the stock for potential recovery. As the old stock market adage goes, “Many long-term investments start as short-term losses”.

2) International Distribution Service slumps

The second of the cheap shares to slide is the Stock of International Distribution Services (LSE: IDS). If the name does not ring any bells, it is a handle recently introduced for the former Royal Mail Group.

Of course, Royal Mail is a British institution, with a history that dates back to 1516 and King Henry VIII. But recent history has been one of labor disputes, industrial action, and rounds of strike action.

At the end of June 2022, my husband bought this FTSE 250 firm at all-in prices of 273.2p. Unfortunately, since August, the stock has fallen as union members went on strike for higher pay and better conditions. With neither party willing to compromise, the stock lost. At a 52-week low, they crashed to 173.65p on 14 October.

As I write, the IDS share price is at 228.6p, having fallen by almost half (-48.7%) over the past year. It is also around six (-16.3%) below our purchase price. Again, after buying this cheap stock for its dividend yield potential, we are now dealing with a sizable paper loss.

Meanwhile, the group’s market value has fallen to £2.2bn – a shadow of its former size. And shares could suffer if the board decides to cut the 2022/23 dividend payment. But I see a strong potential for price recovery if and when the group settles with its striking workforce. For now, we’ll hang on to this amazing stock in hopes of recovering decent earnings and dividends again!