Today I am looking at three London laggards that I believe investors should keep on avoiding.
Commodities clanger
Concerns over chronic oversupply in the metals and energy markets has seen BHP Billiton‘s (LSE: BLT) share price continue to struggle during the past six months. Heady commodity price rises have ground to a halt in recent weeks as the market has stepped back to consider whether buying activity has become far too heady.
I certainly believe that these price ascents have no grounding in reality, and are indeed the product of rampant speculative buying rather than improving supply/demand balances.
A much-needed production cut from oil cartel OPEC remains as elusive as ever, while in the metals markets many major producers remain committed to swamping the market with unwanted supply. Meanwhile, fresh signs of economic cooling in China suggests that hulking imbalances across major commodity markets are set to persist.
The City expects earnings at BHP Billiton to tank 89% in the year to June 2016, resulting in a ridiculously-high P/E rating of 79.1 times. I believe this leaves plenty of room for the firm’s share price to erode still further.
Going stale
Eateries chain Restaurant Group (LSE: RTN) has been, by some distance, the FTSE 250’s (INDEXFTSE:MCX) worst performing stock since mid-November.
Investor nerves have been hit by a series of worrying updates since the turn of the year. And Restaurant Group’s share price took another battering in late April after the firm cautioned of “a further deterioration in trading conditions” since early March.
Sales are now likely to fall between 2.5% and 5% in 2016, a performance that would see pre-tax profit clock in at £74m-£80m. The company punched profits of £86.8m last year.
Restaurant Group is facing significant structural problems as the growth of Internet shopping dampens footfall at retail parks, home to many of its outlets. Meanwhile, the break-neck rise of the takeaway market, allied with competition from traditional eateries, is also hampering the firm’s turnaround prospects.
The City expects Restaurant Group to endure a 10% earnings slip in 2016 alone. And while a conventionally-low P/E rating of 9.7 times may tempt many bargain hunters, I believe the stock’s worsening outlook could prompt further share price pressure in the weeks and months ahead.
Market mayhem
Supermarket giant Tesco’s (LSE: TSCO) stock price has turned lower again following a spritely start to the year, forcing it into the red over a six-month time period.
This comes as little surprise to me, I must confess, and I have long argued that signs of a sales resurgence were likely to prove short-lived. And so it has proved the case. The latest Kantar Worldpanel data showed Tesco’s sales slip 1.3% during the three months to April 24 as Aldi and Lidl continued to make inroads into the grocery market.
With the discounters embarking on aggressive expansion schemes, it is hard to see Tesco’s revenues outlook improving any time soon. The Cheshunt-headquartered chain has consistently failed to match its rivals on cost, successful product rebranding or by improving the customer experience.
Even though the City expects earnings at Tesco to more than double in the year to February 2017, this still creates a mega-high P/E rating of 23.7 times. I do not believe this fairly reflects the supermarket’s elevated risk profile, and like BHP Billiton I reckon this frothy reading leaves the stock in danger of a serious retracement.
