Today I am discussing whether now is the time to bulk up on three London laggards.
WM Morrison Supermarkets
Shares in beleaguered grocer Morrisons (LSE: MRW) have resumed their familiar downtrend once more, the business shedding another 16% since the start of August and striking fresh 10-month lows just today. Trading at around 154p per share, Morrisons is just a whisker away from touching prices not seen since the turn of the millennium.
Indeed, with the situation steadily worsening for the Bradford firm, I reckon a plunge to these levels is an inevitability. Morrisons saw like-for-like revenues slide a further 2.7% during March-August, forcing underlying pre-tax profit 35% lower to £117m. Despite introducing a wide variety of measures in recent years, from new loyalty schemes to launching an online service, the company is no closer to stopping its customers flocking to its rivals.
Morrisons is facing a crisis of identity as it cannot compete with Aldi and Lidl on price, while customers seeking a better quality of product head off to the likes of Waitrose. The City expects the firm to punch a third successive earnings decline in the 12 months to January 2016, and a 6% drop is pencilled in. And I believe a consequent P/E ratio of 15.6 times is too high considering the lack of growth drivers at the firm, not to mention relentless march of its cut-price competitors.
Quindell
Well, where does one start with telematics business Quindell (LSE: QPP)? The firm’s shares resumed trading again in early August after a six-week hiatus — Quindell was forced to suspend dealing as its error-strewn financials were being scrutinised — and a subsequent 21% stock price dive to current levels suggests that investors expect more pain to come.
Last week US hedge fund Beach Point upped its stake in Quindell to more than 5% after purchasing some 420,000 shares, a move that followed the much-awaited appointment of new chief executive Indro Mukerjee in August. Along with other major boardroom installations, the Fareham business is hoping the move will represent a clean break from its past misdeeds, actions that have included everything from questionable asset sales through to dodgy share dealings at the top.
But Quindell continues to court fresh controversy, and has announced this plans to buy the 50.1% stake in PT Healthcare Solutions that it does not already control. But in typical Quindell style things are not that simple, as the new acquisition will be financed via a fresh share issuance. Further complications are not what investors are looking for, with the firm already the subject of a Serious Fraud Office probe and its revenues outlook under harsh scrutiny. I believe the business remains a risk too far for canny investors.
Plexus Holdings
Thanks to the effect of a tanking crude price, I believe that oil services provider Plexus Holdings (LSE: POS) can expect much more share price weakness in the weeks and months ahead. Shares have endured a bumpy ride over the past month amid rising fears over the Chinese economic slowdown, and with economic data continuing to worry — factory activity rose ‘just’ 6.1% in August, numbers showed this week — I believe Plexus could be in line for further woe.
The engineer is arguably in a stronger position than many of its peers thanks to its unique POS-GRIP friction-grip technology, a product developed in the wake of the 2010 Deepwater Horizon disaster. The gear not only improves safety but cuts costs, a critical factor in today’s climate of lower revenues, and last week the company launched its POS-GRIP Python Subsea wellhead in Aberdeen. Plexus also announced a deal with Aquaterra Energy to develop a new product based on its technology.
But with oil producers the world over drastically slashing their capex targets for this year and beyond, I believe demand for Plexus’ expertise could come under increasing pressure. The business is expected to punch a 5% earnings rise in 2015, a hefty reduction from the growth of previous years. And an ultra-high P/E ratio of 34.2 times leaves the business in danger of a hefty share price correction should crude prices continue to sink and exploration budgets undergo further revisions.
