With thousands of UK shares to choose from, investors are spoilt for choice. However, with so many potential businesses to buy, it can be quite daunting to know where capital should be allocated. And often, novice investors fall prey to the herd mentality. After all, if everyone else is buying shares in a business, it must be a no-brainer buy, right?
Looking at the list of most bought shares on Hargreaves Lansdown’s platform, the three most popular shares on the London Stock Exchange right now are John Wood Group (LSE:WG.), Rolls-Royce and AstraZeneca. But this begs the question, are they actually good investments?
Generally speaking, popular shares seldom deliver the best returns. Rolls-Royce certainly seems to defy that logic, with shares up almost 140% in the last 12 months. But with so much growth already under its belt, the opportunity to profit may have already passed.
All of this is to say that blindly buying what’s popular isn’t a sound investment strategy. And a closer inspection of John Wood Group immediately reveals why.
The popularity trap
It doesn’t take much effort to notice that something is going horribly wrong with John Wood. Shares of the engineering business collapsed 60% this month on the back of its latest earnings. And that’s after already suffering a 35% crash in August.
Management’s been under a lot of investor pressure in recent years. Shareholder demand forced the board to entertain a potential buyout offer in 2023 from private equity group Apollo. The deal ultimately fell through. But it was less than a year later that another interested party, Sidara, came along for another try. Once again, shareholders pressured management to consider a buyout and, once again, the deal failed, triggering that crash in August.
Meanwhile, John Wood’s latest interim results revealed a $815m impairment charge along with $140m in additional expenses as the firm exits certain projects. Combined, that translated into a monstrous operating loss of $899m. And with the announcement of an independent audit of its financials in its third-quarter results, the stock price once again plummeted.
Needless to say, the situation at Wood Group’s pretty dire. Withdrawals of takeover bids followed by an audit don’t exactly paint a healthy picture. And any investors who are just following the crowd could find themselves saddled with what appears to be a ticking time bomb. So why are Wood Group shares so popular right now?
The hope for a comeback
As disastrous as the situation seems, there are a few additional factors to consider. To start things off, the $815m impairment was charged against goodwill, which is a non-cash expense. In other words, this is only a paper loss. In the meantime, some encouraging signs are emerging.
Over in the consulting segment, John Wood’s seemingly been able to exercise some pricing power and expand profit margins. Management’s also been disposing of underperforming non-core operations helping to raise $125m. And overall, it recently reiterated its full-year guidance.
Assuming these targets are met, and with the shares trading close to their 52-week low, this may be a buying opportunity to consider. However, that’s a pretty big assumption, especially if the audit reveals even more impairment charges. That’s why it’s not a risk I’m willing to take, even with £100.
This post was originally published on Motley Fool
