Is It The Perfect Time To Buy These Underperforming Shares? G4S plc, ARM Holdings plc, Compass Group plc and Utilitywise plc.

Are these shares contrarian picks? G4S plc (LON:GFS), ARM Holdings plc (LON:ARM), Compass Group plc (LON:CPG) and Utilitywise plc (LON:UTW).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s usually not a good idea to buy shares that have been fallen significantly in a short period of time, as such shares generally fall further. Buying falling shares is often compared to catching a falling knife: it’s too risky, and you’ll most likely get hurt trying to do so. But, just occasionally, stocks can make a recovery, and taking a contrarian view may pay off.

Here’s a look at four stocks that have been sold off in recent weeks:

Lacklustre

Shares in G4S (LSE: GFS) fell 5.4% to 255p today, as Goldman Sachs downgraded its shares from a neutral rating to a sell rating. The broker also cut its price target from 300p to 260p, after a lacklustre set of first half results yesterday. Analysts at Goldman Sachs are bearish on the company, as it expects G4S will need to increase capital expenditures because of disruptive technological developments affecting the industry. This would reduce free cash flow, and is likely to constrain future dividend growth in the medium term.

G4S trades at a forward P/E of 17.6, based on analysts expectations that underlying EPS will grow 17% to 15.1p in 2015. Earnings are set to grow another 13% in 2016, to 17.0p, which gives the c0mpany a forward P/E of 16.0 for 2016. Its current dividend yield is 3.4%. As G4S has relatively expensive forward P/E ratios and an outlook of relatively limited dividend growth in the medium term, I would rather stay out of shares in G4S.

Very expensive

ARM Holdings‘ (LSE: ARM) shares have fallen 9.4% over the past month, as weak forecasts for demand in Apple’s iPhone dragged its share lower. Despite this, ARM reported a 32% rise in underlying profits in the second quarter of 2015. ARM’s revenue figures have so far been resilient, and the company intends to offset slowing smartphone sales growth with growth from consumer electronic and automotive uses.

As earnings remain robust, investors may think this is a good opportunity to buy ARM shares. But, with a forward P/E of 31.3 and a dividend yield of just 0.8%, shares in ARM are still very expensive.

Further to fall

Compass Group (LSE: CPG) faces yet another restructuring plan, as trading conditions remain tough. Shares in Compass have fallen by 7.2% over the past month, as shareholders are beginning to lose their patience with the gradual margin erosion and weak revenue growth.

With a pricey forward P/E of 19.6, shares in Compass Group could fall still further.

Robust demand

Shares in Utilitywise (LSE: UTW) fell 11.0% today, extending the decline in its share price to 24.9% over the past two days. In a trading update released yesterday, it warned that EBITDA would be “slightly below market expectations” this year, following an expansion of its workforce and accelerated investment plans. Broker Panmure Gordon cut its rating on its shares to a sell rating today.

Although the significantly expanded cost structure had been unexpected, business is booming for the small cap utility cost management consultancy firm. It expects revenue for its 2014/5 financial year to beat market expectations at approximately £69 million, which represents a 42% growth rate. This shows that demand for the company’s business utility solutions remains robust. As longer term fundamentals remain broadly intact, shares in Utilitywise are attractive on the recent turmoil in its share price.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »