The FTSE 100 closed at a record high at the end of last year, but not all companies shone equally in 2016. Investors in a number of FTSE 100 firms saw the value of their shares fall sharply.
In my opinion, some of these companies offer underlying value, which should eventually drive their share prices higher. But the outlook for others seems much less certain. In some cases, I believe further falls are likely.
Today, I’m going to take a look at three of last year’s biggest FTSE fallers. Will they make up lost ground in 2017, or should you ditch them from your portfolio before they do any more damage?
A tough choice
September’s profit warning pulled the trigger on a collapse that saw Capita (LSE: CPI) end last year down by 55%. Like most companies in the outsourcing sector, Capita says that one-off costs, a reduction in new contracts and tough trading conditions are putting pressure on profits.
Broker forecasts have been cut, and now suggest that Capita will report adjusted earnings of 64p per share for 2016. This puts the stock on a forecast P/E of 8.3, with a prospective dividend yield of 6.1%.
That sounds cheap, but I can see two possible risks. The first is that debt levels are becoming uncomfortably high. Although the planned sale of Capita Asset Services should improve this situation, no buyer has yet been found.
The second risk is that it’s too soon to say whether management has got to the bottom of the group’s problems. Another profit warning may be required. For these reasons, I’m going to steer clear of Capita for a little longer yet.
Another record-breaking year?
Shares of investment group Hargreaves Lansdown (LSE: HL) fell by about 17% last year, despite the group’s quarterly revenue hitting a new record of £90.6m during the third quarter.
One reason for this was management’s warning in October that “investor confidence has fallen”. The group saw a 22% reduction in new cash inflows, and a 17% fall in new customer numbers during the three months to 30 September.
Hargreaves remains an excellent business, in my opinion. The group reported an operating margin of 58% last year, and its £209m net cash pile is equivalent to a full year’s profits. However, growth seems to be slowing. Earnings per share are expected to rise by less than 10% this year. On that basis, the stock’s forecast P/E of 30 looks too expensive to me.
Is this a cheap, good stock?
Post-tax profits have doubled since 2011 at television group ITV (LSE: ITV). The secret to this success has been the firm’s focus on producing and reselling its own programmes, rather than buying them in. This strategy has also reduced ITV’s dependence on advertising revenue.
However, investors are starting to worry that this strategy won’t be sustainable. The firm’s shares fell by about 25% last year, and now trade on an undemanding forecast P/E of just 12.5.
Can ITV keep on pumping out commercial hits? If you think it can — or if you’re attracted by the group’s potential as a takeover target — then ITV could be a smart buy at current levels. This year’s forecast dividend yield of 4.1% is above the market average and should be covered twice by earnings.
