When cheap shares go badly wrong!

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

When cheap shares turn bad

1) Persimmon plunges

By far my biggest blunder in 2022 was buying the cheap shares of leading UK housebuilder Persimmon (LSE: PSN). In late July, my wife bought this FTSE 100 stock for our family portfolio for its huge dividend yield. Unfortunately, Persimmon’s double-digit cash yield soon turned into a double-digit price decline.

After Persimmon shares had already fallen steeply from their 2021 highs, we bought this stock at 1,856p. The share price now stands at 1,418p, down 438p from our buy price. That’s a loss of almost a quarter (-23.6%) in around six months. Ouch.

In my post-mortem to establish what went wrong, I recalled that ultra-high dividend yields rarely last. All too often, share prices crash or dividends get slashed. For sure, Persimmon’s last full-year dividend of 235p a share won’t be paid in 2022/23. Instead, I expect to collect less than half of that. Oops.

Persimmon shares are down over two-fifths (-40.6%) over the last year and could be hit even harder by rising interest rates and falling disposable incomes. But we’ll hang onto our shares for their recovery potential. As one old stock-market saying goes, “Many a long-term investment started out as a losing short-term one”.

2) International Distributions Services slumps

The second of my cheap shares to slide is the stock of International Distributions Services (LSE: IDS). If that name doesn’t ring any bells, it’s the recently introduced handle for the former Royal Mail Group.

Of course, Royal Mail is a British institution, with a storied history dating back to 1516 and King Henry VIII. But its most recent history has been one of labour disputes, industrial action, and rounds of strike action.

In late June of 2022, my wife bought into this FTSE 250 firm at an all-in price of 273.2p. Alas, from August onwards, the shares plunged as union members went on strike for higher pay and better conditions. With neither side willing to compromise, the shares took a beating. At their 52-week low, they crashed to 173.65p on 14 October.

As I write, the IDS share price stands at 228.6p, having collapsed by almost half (-48.7%) in the past year. It also stands around a sixth (-16.3%) below our buying price. Again, having bought these cheap shares for their dividend-generating potential, we’re now sitting on a sizeable paper loss.

Meanwhile, the group’s market value has declined to under £2.2bn — a shadow of its former size. And the shares could suffer if the board decide to cut the 2022/23 dividend payout. But I see strong potential for a price recovery if and when the group settles with its striking workforce. For now, we will hang onto this shell-shocked stock in the hope of an earnings recovery and decent dividends once again!