Should You Buy Last Week’s Winners Pearson plc, Ocado Group PLC & WH Smith Plc?

Could Pearson plc (LON:PSON), Ocado Group PLC (LON:OCDO) and WH Smith Plc (LON:SMWH) reward investors today?

| 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.

Pearson (LSE: PSON), Ocado (LSE: OCDO) and WH Smith (LSE: SMWH) were in favour with investors in last week’s wobbly market, and all three have made further gains in morning trading today.

Are these stocks set to outperform in what is shaping up to be a difficult year in the markets?

Pearson

Shareholders of Pearson have had a rough time over the last 10 months. The value of the company has almost halved over the period, as restructuring and drastically reduced profit expectations have taken a heavy toll.

However, the shares jumped 17% last Thursday after the company released a trading update. Pearson announced a further round of restructuring, but the shares were boosted by news that the Board intends to maintain the dividend.

The company gave earnings-per-share (EPS) guidance of between 50p and 55p for 2016, which would barely cover the dividend of 51p, but the Board expressed its “confidence in the medium term outlook”.

Pearson has disposed of its prize media assets the Financial Times and the Economist, and a divestment of its last remaining media stake, in Penguin Random House, seems likely to follow in due course.

I’m unconvinced by Pearson’s strategy of selling the family silver to invest in “a significant medium-term market opportunity” in digital educational courseware and assessment. And a price-to-earnings (P/E) ratio of 14.5 and precarious dividend yield of 6.7% don’t tempt me.

Ocado

I thought the valuation of online grocer Ocado was too rich when I looked at the company last summer. At a share price of 378p, Ocado’s EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) was a sky-high 32.4.

The shares are 100p lower today, and trade on an EV/EBITDA of 23.1. That’s still a relatively high rating, supported by investors who continue to see the potential for ‘something big’ to happen.

Ocado has been telling us for what seems like an eternity that it has received interest from potential international partners, but its “target of signing a first agreement during 2015” failed to happen. However, the shares jumped last week after the Daily Mail ran a story headlined: ‘Amazon set to swoop on Ocado as it prepares to launch a fully-fledged grocery delivery service in the UK’.

A bid, or a big international deal (or deals) may or may not happen. But I find it hard to see that Ocado’s current valuation is merited based on its existing operations.

WH Smith

WH Smith has been well-managed to consistently grow annual profits and cash flows in the face of flat revenues. Growth in the group’s Travel division (airports, railway stations and so on) has offset declining High Street sales, and a focus on margins and cash generation has delivered superb long-term returns for shareholders from both share price appreciation and dividends.

The shares made another leap last week, following the release of the company’s latest trading update. Of particular note, was 0% revenue growth in High Street like-for-like sales for the 20 weeks to 16 January — the first time in more than a decade that sales in the division haven’t shrunk! The performance over the five-week period to 2 January was actually positive at 2%, and, as a result, the company said: “we expect profit growth for the year to be slightly ahead of plan”.

With the shares above 1,800p, WH Smith trades on a P/E of 19 with a dividend yield of 2.4%, which seems about fair, rather than outstanding, value.

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.

G A Chester 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.

More on Investing Articles

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

The Anglo American share price soars to £25, but I’m not selling!

On Thursday, the Anglo American share price soared after mega-miner BHP Group made an unsolicited bid for it. But I…

Read more »

Investing Articles

Now 70p, is £1 the next stop for the Vodafone share price?

The Vodafone share price is back to 70p, but it's a long way short of the 97p it hit in…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

If I’d put £5,000 in Nvidia stock at the start of 2024, here’s what I’d have now

Nvidia stock was a massive winner in 2023 as the AI chipmaker’s profits surged across the year. How has it…

Read more »

Light bulb with growing tree.
Investing Articles

3 top investment trusts that ‘green’ up my Stocks and Shares ISA

I’ll be buying more of these investment trusts for my Stocks and Shares ISA given the sustainable and stable returns…

Read more »

Investing Articles

8.6% or 7.2%? Does the Legal & General or Aviva dividend look better?

The Aviva dividend tempts our writer. But so does the payout from Legal & General. Here he explains why he'd…

Read more »

a couple embrace in front of their new home
Investing Articles

Are Persimmon shares a bargain hiding in plain sight?

Persimmon shares have struggled in 2024, so far. But today's trading update suggests sentiment in the housing market's already improving.

Read more »

Market Movers

Here’s why the Unilever share price is soaring after Q1 earnings

Stephen Wright isn’t surprised to see the Unilever share price rising as the company’s Q1 results show it’s executing on…

Read more »

Investing Articles

Barclays’ share price jumps 5% on Q1 news. Will it soon be too late to buy?

The Barclays share price has been having a great time this year, as a solid Q1 gives it another boost.…

Read more »