Should you avoid Restaurant Group plc, Next plc, Marks and Spencer Group plc and Thomas Cook Group plc at all costs?

Are the risks around retail quartet Restaurant group plc (LON: RTN), Next plc (LON: NXT), Marks and Spencer Group plc (LON: MKS) and Thomas Cook Group plc (LON: TCG) too big?

| 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.

Retail has been one of the market’s worst performing sectors so far this year. A fragile consumer spending recovery coupled with disruptive technological upstarts are two factors that have combined to give traditional retailers a serious headache and a wave of profit warnings has hammered the sector.

Multiple profit warnings

Restaurant group (LSE: RTN) has issued several profit warnings over the past 12 months, and this once-highly-rated growth stock has crashed back down to earth this year. Year-to-date the company’s shares have collapsed by 48% after two serious profit warnings and the market is no longer willing to award the company a premium growth multiple.

At the end of 2015 Restaurant group traded at a P/E of 20.1 and offered a dividend yield of only 2.6%. Now, the group’s shares trade at a forward P/E of 10.5 and support a dividend yield of 4.9%.

However, over the past 20 days shares in the group have risen by around a third on bid rumours. Buying in the hopes that an offer will emerge for the company is often a risky strategy as, if no offers emerge, the company’s shares usually crash back to earth.

Below expectations

Shares in Next (LSE: NXT) have also had a tough time this year as investors have turned their back on the company following an announcement that trading for the year will be below expectations. Year-to-date, Next’s shares have fallen by around a quarter, but this could be an interesting opportunity for value investors.

Next has a history of returning all excess capital to investors via both buybacks and dividends, and this trend looks set to continue. Based on current estimates, Next’s shares trade at a forward P/E of 12.3 and support a dividend yield of 3.6%.

Hurting profits

Yesterday, more than 10% of Marks and Spencer’s (LSE: MKS) market capitalisation was wiped out in a single day after the company warned that a restructuring programme would weigh on profitability for the next few years. This warning should have come as no surprise to investors as Marks’ recovery has been struggling to gain traction for some time.

Nonetheless, despite lowered expectations for growth, shares in Marks are still trading at a relatively attractive forward P/E of 12.5 and support a dividend yield of 5.5%. The payout is covered twice by earnings per share.

On track to hit targets

Thomas Cook (LSE: TCG) hit a near three-year low this week as traders were betting against the company following further terrorist attacks in Egypt. The company has also been hit by a proposed strike by Thomas Cook Airlines staff who are striking over health and safety concerns and “dangerous” changes to rest breaks.

Still, this month management stated that despite headwinds, the company is on track to hit its growth targets through to 2018. It remains to be seen whether or not Thomas Cook will hit these forecasts but at present, City analysts expect the group to report earnings per share of 12.4p for the year ending 30 September 2017. That puts the group on a 2017 forward P/E of only 5.7.

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.

Rupert Hargreaves 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

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

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

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »