Why I’ve Bought G4S Plc

G4S plc (LON:GFS) – a contrarian play on the global boom in outsourcing.

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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.

A new week brings a new buying opportunity. This is a contrarian play with great growth potential.

Security firm G4S (LSE: GFS) has suffered a series of crises — quite simply, things have not been good. First there was last year’s Olympics fiasco, which led to the resignation of chief executive Nick Buckles. Then there was the recent tagging scandal, where the firm was thought to have over-charged the government for criminal offender tagging contracts by tens of millions of pounds.

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The mood music is awful, and it seems no investor at the moment will touch this business with a bargepole.

But let’s put this in some kind of perspective; let’s see the big picture. This is a company with 620,000 employees in 125 countries. Only Walmart and Foxconn employ more people globally.

In an organisation such as this, which is the size of a city, there will inevitably be crises and scandals. But over the long term, seen in the round, this is still a successful company with a bright future.

The company’s “Barclays moment”

This firm’s difficulties remind me of another company that has had its share of strife and negativity: Barclays (LSE: BARC) (NYSE: BCS.US).

Last year, Barclays was mired in the LIBOR rate-fixing scandal, engulfed in and overwhelmed by this crisis, which cost chief executive Bob Diamond his job. The share price crashed, and no one would dare invest in the company.

Fast forward a year and the bank’s share price has more than doubled. The LIBOR scandal seems all but forgotten, and Barclays is powering ahead. The storm of scandal has blown over, and now all we see is clear blue sky and sunshine.

A strong contrarian buy

The share price of GFS has crashed by a third (over a billion pounds) in just a few months. In my view, this is an over-reaction. The fundamentals of this company are still good.

As governments around the world reduce costs, they will outsource more and more of their work. The outsourcing trend means that companies such as GFS, Serco and Capita are canny investments. GFS is considerably cheaper than its rivals.

It isn’t often you see a business with a P/E ratio of just 11 that is steadily growing and has great long-term prospects. I rate this company a strong contrarian buy.

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> Prabhat owns shares in G4S and Barclays, but in none of the other companies mentioned in this article.

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