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

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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:

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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.

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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.

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