Are you brave enough to rescue these beaten-down bargains?

Bilaal Mohamed considers whether or not it’s the right time to buy these heavily discounted shares.

| 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.

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.

The UK’s leading outsourcing specialist Capita Group (LSE: CPI) has been the biggest faller in the blue-chip FTSE 100 index so far this year, having shed around 60% of its value over the last 12 months. So, could this be a once-in-a-lifetime opportunity to grab a sensational bargain, or should investors remain cautious and resist the lure of the heavily-discounted share price?

10-year lows

Oh, what a difference a year makes. In the summer of 2015 the London-based outsourcing giant was enjoying its time in the sun after seeing its shares climb to record highs of 1,326p on the back of another successful year of steady growth. In fact, since 2001 Capita hasn’t failed to report growth in both its sales or underlying earnings even once. But it looks like 2016 could be the year it bucks that longstanding trend after the firm yesterday issued its second profit warning in just three months.

Capita said that it now expects underlying pre-tax profits for 2016 to be “at least £515m”, somewhat lower than the £535m to £555m guidance it gave in September, which in itself was well below previous estimates of £614m. The market duly responded, sending the shares 14% lower and changing hands at their lowest level in 10 years.

Slowdown

Capita has had a tough year with a slowdown in its IT Enterprise Services division, costs incurred from its Transport for London contract, and delays in client decision-making all contributing to the downgrade in full-year profits guidance. In response, the board has decided to sell the majority of the Capita Asset Services division and a small number of other non-core businesses, as well as reducing costs, in a bid to become leaner, reduce debt and strengthen its balance sheet.

With Capita’s shares now trading on an ultra-low P/E rating of just seven for the current year, I can certainly see why contrarians would want to consider Capita as a long-term recovery play. But I expect analysts’ earnings estimates to be revised downwards over the coming weeks, and the shares might not be such a bargain after brokers have finished wielding the axe on their profit forecasts. Capita may well turn things around, but I think it’s far too early to be making any buying decisions so soon after the announcement.

Worse for wear

Another firm looking worse for wear this year is specialist building products distributor SIG (LSE: SHI). The FTSE 250 firm lost over a fifth of its value and plunged to near five-year lows last month as it too issued a profit warning for 2016. The group cited delays to some projects in the commercial sector and subdued demand for technical insulation in the petrochemical and manufacturing sectors as the main reasons for the lowered profits guidance.

As a result, the City is now expecting the Sheffield-based firm’s profits to shrink by 12% to £58.27m this year, with a further drop to £56.36m expected in 2017. With no growth in sight, I’d be inclined to give this one a wide berth too.

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.

Bilaal Mohamed 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.

More on Investing Articles

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

A brilliantly reliable FTSE 100 share I plan to never sell!

This FTSE-quoted share has raised dividends for more than 30 years on the spin! Here's why I plan to hold…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

This 7.7% yielding FTSE 250 stock is up 24% in a year! Have I missed the boat?

When a stock surges, sometimes it can be too late to buy shares and capitalise. Is that the case with…

Read more »

Investing Articles

£13,200 invested in this defensive stock bags me £1K of passive income!

Building a passive income stream is possible and this Fool breaks down one investment in a single stock that could…

Read more »

Investing Articles

I think the Rolls-Royce dividend is coming back – but when?

The Rolls-Royce dividend disappeared in 2020 and has not come back. But with the company performance improving, might it reappear?

Read more »

British Pennies on a Pound Note
Investing Articles

Should I snap up this penny share in March?

Our writer is considering penny shares to buy for his portfolio next month. Does this mining company merit a place…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Stock market bubble – or start of a bull run?

Christopher Ruane considers whether the surging NVIDIA share price could be symptomatic of a wider stock market bubble forming.

Read more »

Investing Articles

Buying 8,254 Aviva shares in an empty ISA would give me a £1,370 income in year one

Harvey Jones is tempted to add Aviva shares to his Stocks and Shares ISA this year. Today’s 7.37% yield isn't…

Read more »

Investing Articles

Is the tide turning for bank shares?

Bank shares are trading on stubbornly cheap-looking valuations yet business performance in the sector is broadly robust. Should our writer…

Read more »