Every investor loves to buy at the bottom and sell at the top, but that’s easier said than done. It’s nearly impossible to predict the bottom, and buying shares after big falls can be quite a dangerous strategy. Certainly, some shares bounce back strongly after significant falls, but more often than not, these shares remain unloved for long periods.
With this in mind, here are three beaten-down shares I’m avoiding in March.
Worst performer in 2017
First up is clothing retailer Next (LSE: NXT), which is the FTSE 100’s worst performer so far this year. Its shares have fallen 20% year-to-date after the company warned that profits would likely continue to decline this year.
The retailer, which had until recently been a consistent performer, said rising inflation and the falling value of the pound was likely to lead to higher costs and hurt top-line growth. As such, management expects pre-tax profit to range between £680m and £780m for 2017/18, down from £792m last year.
Although the slump in its shares means Next trades at just 9.2 times forward earnings, I’m not too keen on its shares. There’s no end in sight to the company’s declining top-line and bottom-line performance, and Next’s sales trend is one of the weakest in the sector right now.
And even though its dividends might seem appealing right now, it may be wise to not be tempted. Next may still be generating good free cash flow, but continued shareholder payments depend on its bottom line holding up well. A large proportion of its annual dividends come in the form of special dividends, which could be quickly scaled back if trading conditions continue to deteriorate.
Dividend cut?
Train and bus operator Go-Ahead Group (LSE: GOG) is another stock which has come under pressure in recent months. Operating profits fell 12.9% in the six months to 31 December 2016, as the company was impacted by long-running industrial relations issues in GTR and a slowdown in passenger numbers in its regional bus division.
Its shares are down 23% year-to-date, and that’s dropped its forward P/E ratio to nine, while lifting its dividend yield to 5.5%. But I’m still not convinced as I reckon earnings could fall further. Rail and bus passenger numbers are expected to remain subdued for many years to come and the company is making big capital investments which would likely erode free cash flow, increase debt, and potentially, lead to a dividend cut too.
Premium valuation
Now, Paddy Power Betfair (LSE: PPB) hasn’t fallen out-of-favour entirely with investors, as the company still trades at a hefty premium to its peers. But its shares have been trading lower since it announced its full-year results.
Although underlying EBITDA rose by 35% to £400m in 2016, in line with analysts’ expectations, the recently merged company will likely struggle to maintain momentum. Last year’s results had been boosted by the UEFA Euro 2016 Championship, and without a major sporting tournament this year, there will be fewer cross-selling opportunities, which will mean there will be fewer revenue tailwinds.
What’s more, the shares also seem fully valued, with the company trading at 22.2 times forward earnings.
