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2 bargain basement stocks I’m avoiding like the plague

Martin Pettitt. Licence: https://creativecommons.org/licenses/by/2.0/

With a forward P/E ratio of 7.9 and a whopping 6.39% yielding dividend many bargain hunters may find Debenhams (LSE: DEB) an enticing target. I am not one of them. While the retailer appears cheap I believe there are very, very good reasons that the company’s share price is, and will likely remain, significantly depressed.

The first issue the company is grappling with is the secular decline in footfall to large department stores. Consumers have fallen in love with the convenience of e-commerce, rediscovered a passion for local, more personal, shops, and young shoppers are increasingly gravitating towards fast fashion retailers if they visit the high street at all. Needless to say this has been bad for Debenhams.

The company’s new management team is trying to ameliorate these issues by increasing online sales and opening up itsstores to a variety of restaurants and non-clothing beauty and gift retailers. This strategy is showing signs of working, with constant currency like-for-like sales rising 0.5% year-on-year over the Christmas period.

However, I don’t think this shift will be enough to save the retailer as we know it or make its shares a good investment over the long term. For one, the margins on these non-clothing sales are much lower than the profits to be had from selling clothes. So without a viable plan to once again make Debenhams a popular clothing brand the company is faced with a future of increasingly shrinking profits.

Evidently other analysts agree with me because the company’s earnings are expected to fall by 14% and 9% respectively in the next two years. With its clothing options increasingly unpopular I believe the company’s future may be little more than as a mall for make-up stalls and chain restaurants. And we only have to look across the pond to the US to see how well malls are faring in the 21st century. For these reasons I will be staying well clear of shares of Debenhams.

Renters across the land rejoice 

Another seemingly irresistible bargain that I reckon should be resisted is estate agent LSL Property Services (LSE: LSL). The company’s shares trade at a very depressed 8.4 times forward earnings and offer a 6.18% yielding dividend that is covered by earnings. Again, the market’s pessimism is well deserved.

For one, the company is threatened by what appears to be a peaking housing market. That is issued a profit warning back in July and then blamed a “weak housing market” for a 3.4% year-on-year fall in revenue in the quarter to October certainly suggests this may be the case.

Another worry is the government’s proposed ban on letting fees charged to tenants. This would hit LSL especially hard as the company has long relied on the counter-cyclical nature of the rental market to offset the boom and bust nature of the broader housing market.

These combined threats have already caused analysts to forecast dividend cuts in the future for LSL as profits fall. Take away the company’s income potential, add in a slowing housing market and potential end to highly profitable letting fees and you have a recipe for one share I’ll be avoiding in 2017.

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Ian Pierce 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.