After the 45% crash in October, should I buy this FTSE 250 share for my Stocks and Shares ISA?
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When I see reputable companies whose share prices have fallen significantly, I often consider buying them for my Shares and Shares ISA.
Investing in variable stocks within my ISA means that any gains will be tax free. That can be a huge profit if you buy really unloved stocks.
I FTSE 250 sharing what I’m looking at today is certainly not popular. Shares in the 146-year-old company fell 45% in October alone. The stock is now down a whopping 83% over the past five years.
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What is this fallen star?
The company I am looking at is a professional bank Close the Brotherhood (LSE: CBG). This FTSE 250 company is one of the leading lenders in the UK car finance sector. Unfortunately, this previously successful unit is causing serious problems for the bank.
The Financial Conduct Authority (FCA) is currently carrying out a review of the car finance sector, focusing on historic commission payments paid to brokers.
A number of other major auto finance lenders may be affected, including Lloyds Banking Group. However, none of them are very focused on Close Brothers finances.
Vala’s accounts for July 2024 show car loans of £2bn out of a total loan book of £10bn — that’s 20 per cent of the total loan book.
Lloyds, by contrast, had a car loan book of £16bn at the end of June. But this was only 3.5% of its £452bn loan book, which is mostly residential mortgages.
This concentration could be a big problem for Close Brothers if the FCA decides to make car lenders pay compensation to borrowers. Vala’s compensation can be quite large, compared to the size of its business.
Price bargain or price trap?
The problem is that I really think there he can it was an opportunity here. Historically, Close Brothers has had a strong balance sheet with plenty of cash left over.
Over the course of this year, the bank’s management has taken steps to raise more capital. Sold the group’s asset management division and suspended dividends.
Close Brothers shares are trading at 232p, as I write. That means the stock is trading at an 80% discount to its July book value of around 1,200p per share.
It is likely that when the FCA review is completed, Close Brothers will be able to pay any compensation required and return to business as usual.
It is possible, but not certain.
What I do
The investor in me is exploring the potential here. But the truth is that it is impossible to predict what the potential liability for compensation will be.
If the PPI saga is anything to go by, this car finance review could be longer and more expensive for lenders than currently expected.
The Court of Appeal’s decision against Close Brothers in October made matters worse. It appears that the FCA may require a stricter level of disclosure than previously thought.
To me this situation is very speculative. I will not be adding shares to my ISA. But I will be watching with interest.
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