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BT Group plc or Next plc: which falling knife should you catch?

Image: Next plc. Fair use.

Catching a falling knife is always a hazardous business, but very impressive if you get your timing right. These are the two of the sharpest and swiftest blades on the FTSE 100, should you make a grab for them?

BT or not BT?

Telecoms giant BT Group (LSE: BT.A) plunged more than 20% from 382p to 300p after news of the accounting scandal in its Italian division broke. Investors fled over fears that this was the small tip of a large iceberg, as so often happens with this type of scandal. Yet the panic has abated in recent days, with the share price up 1% over the past week.

There was some good news buried in its recent quarterlies, notably the 32% rise in revenue to £6.12bn, but it was rightly overshadowed by the rise in anticipated Italian writedowns from £145m to a whopping £530m. However, you can’t blame all of BT’s problems on foreign misdemeanours, the outlook for its UK business is also fragile, with revenues for 2016 and 2017 expected to be flat.

Pain or gain?

As if that wasn’t enough, BT also has to tackle its rising debt and pension deficits, which now stand at £9bn and £11.1bn respectively. If these get out of hand, the dividend could come under pressure. JLT Employee Benefits recently calculated that almost half of all FTSE 100 companies could clear their pension deficits with one year’s dividend. That kind of talk could start a trend, one that would trigger further pain for shareholders if BT acted on it.

At today’s 307p, BT’s stock is 38% down from its year high of 496p, which many will see as a buying opportunity. However, you must first weigh a host of threats, notably the rising cost of bidding for Premier League rights, which has just cost rival Sky an extra £314m, smashing operating profits. Today’s 4.56% dividend looks juicy, but can’t wholly be relied on. A forecast valuation of 9.3 times earnings looks tempting, but there’s a reason BT trades so cheaply. Mind your fingers!

Next in line

High street retailer Next (LSE: NXT) has demonstrated the danger of reaching for a falling knife. Its flashing blade has fallen three times since March last year, reducing its share price from a high of 7,110p to today’s 3,890p, a drop of 45%. So could it be third time lucky?

Next was hammered in early January after posting lower than expected sales over the crucial Christmas period, with management warning of further weakness to come. Retailer-unfriendly weather, changing consumer shopping patterns and the rising cost of imported textiles due to the weaker pound combined to give it a thumping.

Look sharp

Further Brexit certainty will do it no favours as consumer confidence looks fragile in the face of rising inflation generally. Shoppers may be reluctant to pay higher prices, making it harder for Next to pass on its rising costs.

As with BT, the worst of the selling is over for now. A valuation of 8.75 times earnings and yield of 4.05% look tempting. Next’s margins are forecast to fall, but should still remain a healthy 17.3%. For those with strong nerves and the patience to hold on for a recovery, this would be my catch of the day.

Clutching at falling knives is one way to get rich from stocks and shares, but there are far safer and potentially more rewarding strategies out there.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.