Should I buy this FTSE 250 share for my stocks and shares ISA after crashing 45% in October?

When I see respectable companies whose share prices are way down, I often consider buying them for my Stocks and Shares ISA.

Investing in turnaround shares within my ISA means any gains are tax free for me. That can be a big advantage when buying truly unloved stocks.

The FTSE250 part I’m looking at today is definitely unloved. Shares in this 146-year-old company fell 45% in October alone. The stock has fallen by as much as 83% in the past five years.

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What is this fallen star?

The company I’m looking at is a specialized bank Close the Brothers Group (LSE: MEB). This FTSE250 Firm is one of the largest lenders in the UK car finance sector. Unfortunately, this previously successful split is currently causing major problems for the bank.

The Financial Conduct Authority (FCA) is currently conducting an investigation into the car finance sector, focusing on historical commission payments paid to brokers.

A number of other major auto finance providers may be affected, including Lloyds Banking Group. However, none of them have the concentrated auto finance exposure of Close Brothers.

Close’s July 2024 accounts show motor loans of £2 billion out of a total loan book of £10 billion – that’s 20% of the total loan book.

By contrast, Lloyds had a £16 billion car finance loan portfolio at the end of June. But this was just 3.5% of the £452 billion loan portfolio, which is mainly residential mortgages.

This concentration could be a major problem for Close Brothers if the FCA decides to make car finance providers pay compensation to borrowers. Close’s compensation could be very large, relative to the overall size of the company.

Value bargain or value trap?

The problem is that’s where I really think could there is an opportunity here. Historically, Close Brothers has had a strong balance sheet with a lot of excess capital.

During this year, the bank’s management has taken steps to raise additional capital. It has sold the group’s asset management division and suspended its dividend.

As I write this, Close Brothers shares are trading at 232p. That means the stock is trading at an 80% discount to its July book value of around 1,200 pence per share.

It is possible that once the FCA review is completed, Close Brothers will be able to pay all necessary compensation and return to normal operations.

Possible, but not certain.

What I’m doing

The value investor in me sees a possible opportunity here. But the reality is that it is impossible to predict what the potential liability for compensation might be.

If the PPI saga is to be believed, this overhaul of car finance for lenders could be longer and much more expensive than currently expected.

A Court of Appeal ruling against Close Brothers in October made matters worse. It seemed to suggest that the FCA could require a stricter disclosure standard than previously thought.

For me, this situation is too speculative. I will not be adding the shares to my ISA. But I will continue to follow it with interest.