GlaxoSmithKline plc, Burberry Group plc & Stagecoach Group plc: Buy Low, Sell High?

Are GlaxoSmithKline plc (LON:GSK), Burberry Group plc (LON:BRBY) & Stagecoach Group plc (LON:SGC) bargains or value traps?

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

To make money from investing, you need to buy assets when their prices are low and sell them when their prices have risen. It sounds simple, but is never that easy in reality.

Stocks that have been heavily sold-off may be cheap for good reasons, and not all cheap stocks are good value. A company with low valuation multiples may be suffering from major problems, or it could be down to cyclical factors. In these situations, investors will most likely find that there is more downside to come. And, as such, these stocks are described as “value traps”.

But, sometimes, the market may undervalue individual stocks. Market participants may overreact to negative news and underestimate the intrinsic value of a particular stock. To distinguish whether a particular stock is a bargain or a value trap, we need to take a look at the company’s underlying fundamentals.

With that in mind, I shall take a look at these 3 stocks:

GSK

GlaxoSmithKline (LSE: GSK) hqw been lagging behind the rest of its sector for some time now. Shares in the company have continued to trend lower this year, falling 4% since January, which comes on top of a 14% decline in its share price in 2014.

GSK has been struggling to replace declining sales of Seretide and Advair, two of its bestselling blockbuster drugs, as pricing pressures and generic competition have been more intense than originally anticipated. What’s worse, sales of Advair will likely continue to decline with introduction of a generic alternative to the drug in the US.

However, analysts are still bullish with their longer term revenue forecasts. Growth in new pharmaceutical products — most notably, its promising HIV and vaccines business — is poised to offset sales declines, and should return the company to growth by 2017. The consensus analyst estimate for revenue growth over the next five years is 3.5%. Underlying EPS is projected to decline by 20% this year, to 75.9p, before rebounding 11% in the following year, to 84.3p.

Its shares trade with a forward P/E of 17.3 and yield 6.0%.

Burberry

A reversal in earnings growth is also the cause of the decline in Burberry‘s (LSE: BRBY) share price this year. The value of its shares has fallen 27% since the start of the year, with the company issuing a profit warning in November. The slowdown in China was largely to blame for slowing sales growth, but there could also be other structural factors at play.

Changing tastes could also be to blame, as some of its competitors have been faring better from the downturn. Unintended complexity from running multiple labels — Prorsum, London and Brit — have also added to the internal complexity of its processes and increased management costs. But management is addressing this, and intends to unify its products under a single Burberry label by 2016.

Moreover, its shares trade at historically low multiples on its forward earnings estimates. Burberry trades at just 16.3 times it expected 2015/6 earnings per share of 73.7p. Over the past five years, shares have traded at an average forward P/E of 20.3.

Stagecoach

Falling demand for travel to big cities, which has hurt Stagecoach‘s (LSE: SGC) “Megabus” long-distance coach service business, has been largely blamed on the recent Paris terrorist attacks. However, many analysts suspect falling revenues could actually be due to a combination of structural headwinds.

Lower fuel prices, weak metropolitan bus routes and increased competition also seem to be causing revenue trends to weaken, and these factors should be of greater concern to shareholders. This is because, these structural factors are long term, and management has few options to deal with them.

So, although its shares trade at just 12.2 times forward earnings per share of 29.3p and yield 3.2%, I’ll be staying out of shares in Stagecoach until revenue trends begin to stabilise.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Burberry, GlaxoSmithKline, and Stagecoach. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 51% in 2024, this FTSE 250 stock is flying!

This writer takes a look at one high-flying FTSE 250 share that still looks good value despite surging to an…

Read more »

Investing For Beginners

Here’s how I’m trying to prevent a stock market crash from ruining my portfolio

Jon Smith explains which shares he's avoiding and what he's thinking of buying to try and protect his portfolio from…

Read more »

Bearded man writing on notepad in front of computer
US Stock

Call me crazy, but here’s why I’m eyeing up the CrowdStrike share price

Jon Smith notes the carnage caused by Friday's global outage, but flags up why he's thinks the CrowdStrike share price…

Read more »

Investing Articles

What do Hargreaves Lansdown results mean for the share price?

The Hargreaves Lansdown share price has surged in recent months on takeover expectations, but what will the recent results mean…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Newly minted S&P 500 stock CrowdStrike just crashed! Here’s why

Shares of S&P 500 firm CrowdStrike collapse as the company lies at the centre of a global IT outage. What…

Read more »

artificial intelligence investing algorithms
Investing Articles

Is Nvidia heading for the mother of all tech stock crashes?

Nvidia stock has soared, and the company briefly became the most valuable on the planet. But not everyone’s an AI…

Read more »

Dividend Shares

The BP share price is down 15% in 3 months. Time to buy?

In the space of just a few months, the BP share price has fallen by a double-digit percentage. Is this…

Read more »

Investing Articles

A 5.4% dividend bargain I’ll buy over Lloyds shares

Harvey Jones loves his Lloyds shares but now he's found a high-yielding FTSE 250 stock that may offer even more…

Read more »