2 bargain basement stocks I’m avoiding like the plague

Don’t be tempted by P/E ratios under nine and 6%-plus dividend yields.

| 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.

With a forward P/E ratio of 7.9 and a whopping 6.39% yielding dividend many bargain hunters may find Debenhams (LSE: DEB) an enticing target. I am not one of them. While the retailer appears cheap I believe there are very, very good reasons that the company’s share price is, and will likely remain, significantly depressed.

The first issue the company is grappling with is the secular decline in footfall to large department stores. Consumers have fallen in love with the convenience of e-commerce, rediscovered a passion for local, more personal, shops, and young shoppers are increasingly gravitating towards fast fashion retailers if they visit the high street at all. Needless to say this has been bad for Debenhams.

The company’s new management team is trying to ameliorate these issues by increasing online sales and opening up itsstores to a variety of restaurants and non-clothing beauty and gift retailers. This strategy is showing signs of working, with constant currency like-for-like sales rising 0.5% year-on-year over the Christmas period.

However, I don’t think this shift will be enough to save the retailer as we know it or make its shares a good investment over the long term. For one, the margins on these non-clothing sales are much lower than the profits to be had from selling clothes. So without a viable plan to once again make Debenhams a popular clothing brand the company is faced with a future of increasingly shrinking profits.

Evidently other analysts agree with me because the company’s earnings are expected to fall by 14% and 9% respectively in the next two years. With its clothing options increasingly unpopular I believe the company’s future may be little more than as a mall for make-up stalls and chain restaurants. And we only have to look across the pond to the US to see how well malls are faring in the 21st century. For these reasons I will be staying well clear of shares of Debenhams.

Renters across the land rejoice 

Another seemingly irresistible bargain that I reckon should be resisted is estate agent LSL Property Services (LSE: LSL). The company’s shares trade at a very depressed 8.4 times forward earnings and offer a 6.18% yielding dividend that is covered by earnings. Again, the market’s pessimism is well deserved.

For one, the company is threatened by what appears to be a peaking housing market. That is issued a profit warning back in July and then blamed a “weak housing market” for a 3.4% year-on-year fall in revenue in the quarter to October certainly suggests this may be the case.

Another worry is the government’s proposed ban on letting fees charged to tenants. This would hit LSL especially hard as the company has long relied on the counter-cyclical nature of the rental market to offset the boom and bust nature of the broader housing market.

These combined threats have already caused analysts to forecast dividend cuts in the future for LSL as profits fall. Take away the company’s income potential, add in a slowing housing market and potential end to highly profitable letting fees and you have a recipe for one share I’ll be avoiding in 2017.

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.

Ian Pierce 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

Concept of two young professional men looking at a screen in a technological data centre
US Stock

Should I buy Palantir stock for my ISA after a 200% gain?

Edward Sheldon has cash to deploy within his ISA. Should he buy Palantir shares for more exposure to the artificial…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

2 UK shares to consider following the US election result

UK shares are inevitably affected by changes across the pond as many FTSE companies do business in the US. Our…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Shares in this FTSE 100 Dividend Aristocrat are trading at a record low multiple

With a spectacular record of dividend growth and shares trading at an unusually low multiple, income investors should take note…

Read more »

Small-Cap Shares

This penny stock invests in start-ups. Here’s why I think it could surge

Jon Smith explains how smart investments in young companies could help this penny stock's share price jump in the coming…

Read more »

Smartly dressed middle-aged black gentleman working at his desk
Investing Articles

Here’s the forecast for BT with the share price at 140p and the dividend yield at 5.7%

Will BT's business continue to turn around and drive the share price and dividends higher? Here's what the indicators say…

Read more »

Investing Articles

Where could the Shell share price go in the next 12 months? Here’s what the experts think

The Shell share price is dropping as industry uncertainty rises, yet the business is beating expectations! So is this secretly…

Read more »

Young female couple boarding their plane at the airport to go on holiday.
Investing Articles

Where might the easyJet share price go in the next 12 months? Here’s what the experts say

The easyJet share price is up 25% in three months with another predicted 56% on the horizon, according to analyst…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

A 6.1% yield but down 31%! Is it time for me to buy more BP shares?

BP shares offer a high yield that's forecast to grow to end-2026, and a big projected rise in earnings leaves…

Read more »