Today, I’m ringing an alarm bell because I know what you might be thinking.
I say that because a friend of mine is tempted to buy AMP Limited [ASX:AMP] shares. Are you?
Hold your horses. This could just be a classic value trap.
What is a value trap?
It’s when buyers try to snap up shares at a (seemingly) ‘cheap’ price.
This is not something I recommend right now. Here’s the story…
AMP is more of a ‘value buster’
The whole sorry saga here came to light in April 2018 during the Royal Commission.
Evidence came to light that ‘said company’ charged customers fees for services that weren’t delivered.
And as a result of this hearing…
By 20 April 2018, AMP CEO Craig Meller submitted his resignation, along with fellow AMP top dogs Catherine Brenner and Brian Salter.
Fast forward to August 2018 and round two began.
This time, AMP was held up for siphoning cash from its super division into its life insurance division.
And there were also issues surrounding investment fees charged on client accounts.
Go forward to more recent events and, boy oh boy, do they get interesting.
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You see, AMP’s main business is to charge fees for services. (Or lately, for no services!)
Its product offerings were delivered through arms such as superannuation, insurance, managed funds and even mortgages.
But its clients are bailing. One of these arms has seen outflows in excess of $5 billion…
You don’t need to study rocket science to know this is not good for business.
Profits took a massive hit and declined 97%, from a hefty $848 million to a measly $28 million.
That’s not a performance I suggest you chase…but some people are doing it!
It’s one thing to look for ‘value’ in the market…but difficult situations like this are best avoided, usually.
AMP’s recent price action is an example of why. On Monday, the AMP share price tumbled 16%.
This came on the back of AMP cutting its shareholder dividend, and the Kiwi central bank unlikely to approve the current deal around the sale of AMP’s life insurance arm.
So, for now it looks like AMP gets to hold on to its lousy life insurance business.
But that doesn’t do anything to solve the crumbling share price.
However, let me leave you with a final thought…
The turnaround story of 2020?
Now, clearly you can see the poor sentiment regarding this company.
This will take time to burn off.
However, from disasters like this can come opportunity later.
Just consider for a moment what’s happened to Telstra over the last 12 months.
The share price has slowly but surely risen since finding a floor in July 2018.
Investors can thank the Telstra 2020 restructure project.
It could be a similar story with AMP in the coming months.
But don’t rush in now!
It’s an idea to consider and follow.
The lesson from Telstra is that, at some point, all the horrible news and announcements from AMP will be fully priced in.
At that time, AMP will have an opportunity to start growing the business again.
However, we want to see evidence of this happening before committing any money.
There are two things to watch for as we go along. One is a return to healthy revenue growth. Or, if you’re technically inclined like me, a return to momentum via a recovering share price.
Neither of these are in play yet. So, for now, the value trap warning stands.
Until next time,