Today I am looking at the bounceback potential of three recent London losers.
Supermarket scares
The share price of embattled grocer Sainsbury’s (LSE: SBRY) went on a fresh down-leg between last Monday and Friday, chalking up a 3% weekly decline. And I believe further weakness can be expected as competitive challenges steadily increase.
Just today, Morrisons announced it will sell its goods in the UK via Amazon’s online presence, a move that significantly boosts the American retailer’s foray into the British grocery space. In addition, Morrisons announced it was taking space in Ocado’s distribution hub in Erith, London, to bolster the geographical reach of its own online presence.
With Sainsbury’s already being battered by the relentless expansion of discounters Aldi and Lidl — not to mention premium outlets like Waitrose and Marks & Spencer — the City expects its earnings to fall 16% and 3% in the years to March 2016 and 2017 correspondingly.
And I believe even these insipid forecasts could be subject to further downgrades as the operating environment worsens, making even a low prospective P/E rating of 11.5 times unattractive value.
Recruit this growth great
Recruitment specialists Hays (LSE: HAS) also had a week to forget, the business shedding 7% of its value between last Monday and Friday.
Investor confidence took a knock following news that net fees at Hays edged just 3% higher between July and December, to £396.9m, although on a like-for-like basis this represented a chunky 8% advance. Pre-tax profits rose 7% to £82.4m during the period.
However, I believe stock pickers could be missing a trick here. Hays has worked hard to improve its global footprint in recent times, a strategy that I believe should deliver strong earnings improvements in the years ahead — indeed, the recruiter saw net fees rise by 10% or more across 17 of the countries it operates in during the first half.
The number crunchers expect Hays to enjoy earnings rises of 9% and 19% in the years to June 2016 and 2017 respectively, resulting in P/E multiples of 14.4 times and 12.1 times. I believe this represents very decent value given Hays’ great success on foreign shores.
A fashion favourite
Retail giant NEXT (LSE: NXT) also saw its share price dip during the course of last week, the stock chalking up a 3% decline during the period. Weak investor appetite pushed the business to its cheapest for 14 months earlier in February, but I believe this persistent weakness represents a dip-buying opportunity for savvy investors.
The huge investment in its NEXT Directory internet and catalogue division leaves the London business in great form to enjoy the fruits of surging home shopping in the years ahead, supported by a steady improvement in consumer spending power. And I reckon NEXT’s foray into foreign markets should reap excellent rewards once current turbulence in these regions abates.
The City expects NEXT to keep its exceptional growth record rolling with advances of 5% in the periods to January 2017 and 2018, resulting in decent P/E ratings of 15 times and 14.4 times correspondingly. And mammoth dividend yields of 6% for 2017 and 6.4% for 2018 seal the investment case, in my opinion.
