3 Stocks I’m Avoiding For 2016: BT Group plc, Balfour Beatty plc And Focusrite PLC

Here’s why these 3 stocks are not on my buy list for next year: BT Group plc (LON: BT-A), Balfour Beatty plc (LON: BBY) and Focusrite PLC (LON: TUNE)

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Today’s update from Balfour Beatty (LSE: BBY) is relatively upbeat and shows the construction company is making encouraging progress with its turnaround plan. Balfour Beatty has enjoyed success in recent weeks in winning new contracts on improved terms but the order book is expected to remain flat in the second half of the current year. Crucially, the company expects to be net cash positive at year-end and is successfully managing the problem projects that are a key reason for the multiple profit warnings of recent years.

Balfour Beatty has also agreed a new $400m syndicated revolving credit facility and as it nears the end of its first year under a new strategy, it appears to be moving in the right direction.

Looking ahead, Balfour Beatty is expected to return to profitability next year. Beyond that, it could begin to offer strong growth potential as its legacy problems fade and its new strategy boosts the bottom line. But there’s a problem – its valuation appears to be rather high with next year’s forecast profit already fully factored into the company’s share price via a price-to-earnings (P/E) ratio of 22.6.

With a number of other support services/construction companies trading on far lower ratings, Balfour Beatty may be an improving business but it lacks appeal relative to its peers at the present time.

Big risks

Similarly, BT (LSE: BT-A) is also on the up having become a quad play operator and on the cusp of a deal to acquire EE, the UK’s largest mobile network, for £12.5bn. Add to this a major investment in sports rights (including £900m on Champions League football) and it’s clear that BT is pressing ahead with an ambitious strategy in an attempt to muscle in on what’s set to be a lucrative quad play market.

While this strategy could deliver high rewards, it also comes with a high degree of risk. BT has deep pockets and its investments could pay off over the medium term, but with a large pension liability and a significant amount of leverage, the market may not be fully pricing in the financial risks from its current strategy. While BT has been an excellent performer recently (its shares are up by 8% in the last three months), its P/E ratio of 15.5 could come under a degree of pressure in 2016.

Overvalued for now

Meanwhile, music production supplier Focusrite (LSE: TUNE) today reported an impressive set of maiden results after it floated in December 2014. For the full-year, the company reported pre-tax profit of £6.5m, a 12% increase year-on-year. And with first quarter sales in the current financial year being higher than the same quarter a year ago, Focusrite appears to be making encouraging progress.

Despite this, its shares have fallen by almost 20% today. A possible reason is the company’s valuation with its shares having risen by 34% year-to-date before today’s fall. And while Focusrite appears to be moving in the right direction and is set to grow revenue in the current year, its earnings per share are due to fall by 8%. With its shares trading on a P/E ratio of 14.4, there appears to be a lack of upward rerating potential in the medium term.

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Peter Stephens 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.

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