Barclays (LSE: BARC), GlaxoSmithKline (LSE: GSK) and Tesco (LSE: TSCO) are some of the most renowned companies on the FTSE 100, and the most troubled.
Over the last year, Barclays is down 19%, Glaxo is down 12% and Tesco is down a whopping 39%. These stocks are falling knives, no doubt about it. But are they classic contrarian buys?
On The Contrary…
Investopedia defines contrarian as “an investment style that goes against prevailing market trends by buying assets that are performing poorly and then selling when they perform well”.
So yes, all three are classic contrarian buys, given the negative prevailing market view. The question is whether they can fulfil the second part of the bargain, by performing well and giving you the opportunity to sell at a profit.
Barclays is cheap, but not that cheap. Today’s valuation of 13.7 times earnings is almost exactly in line with the FTSE 100 average of 13.68 times. Strong forecast earnings per share (EPS) growth of 26% this year and 27% next should improve matters, however, putting it on a tempting forward valuation of 8.6 times earnings for December 2015.
But this is also a troubled organisation with a besmirched reputation that is currently over going a major overhaul, shrinking its investment banks and cutting thousands of jobs worldwide.
It also faces competition at home from a heap of challenger banks, including M&S, Tesco, Virgin and TSB, and a regulatory assault that could throw the key current account market wide open.
Barclays will also suffer from what Neil Woodford calls “fine inflation”, as regulators ramp up their penalties. Nomura reckons Barclays could face fines totalling £7 billion in the next few years.
Any recovery will take years, but I reckon Barclays will endure. Contrarians are supposed to be brave, aren’t they? And very patient.
GlaxoSmithKline has been hit hard by the Chinese bribery scandal, but this isn’t an isolated case. It faces similar allegations in Iraq, Poland, Syria, Lebanon and Jordan.
It is also facing probes by the US Department of Justice and Securities and Exchange Commission, and the UK’s Serious Fraud Office. A multi-million-dollar settlement beckons.
Glaxo has other worries. Its US pharmaceuticals and vaccines turnover fell 10% in Q2, while group sales fell 4% and EPS tumbled 12%.
Credit Suisse has just slashed its earnings forecasts, noting that Glaxo’s shares trade at a 10% price-to-earnings premium to other major European pharmaceutical groups.
Recent successful early trials of an Ebola vaccine are a rare bright point. The real attraction is the yield, now a healthy 5.4%. And you can buy Glaxo at 12.8 times earnings, a rare discount in a stock that is normally fully valued.
Glaxo will eventually shrug off its scandals, and you get a juicy yield while you wait. I have rarely seen a more classic FTSE 100 contrarian buy (and hold).
Tesco looks more like a classical tragedy than a classic contrarian buy.
New boss Dave Lewis has pledged to battle against the fates and furies, but he has an epic fight on his hands. The UK’s biggest retailer has been brought low by a combination of hubris and hungry challengers, in the shape of barbarians Aldi and Lidl.
Like Barclays, Tesco is in a beleaguered sector, plagued by disenchanted customers. Turning around public perception will be a Herculean task. Cutting prices without destroying margins won’t be easy, either.
Following the recent dividend cut, loyal investors don’t even get the luxury of an attractive yield.
What you do get is a brutally cheap valuation of just 7.1 times earnings. If the wheel of fortune swings in favour of Lewis, now could be a fabulous time to buy.
But this contrarian stock is just too contrarian for me.
