Is it finally time to buy these beaten-down FTSE 250 stocks?

Royston Wild analyses the investment outlook of two battered FTSE 250 (INDEXFTSE:MCX) stocks.

| 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.

Fossil fuel explorer Cairn Energy (LSE: CNE) has steadily fallen out of favour with share pickers in recent weeks — the stock has shed 17% of its value since striking three-year peaks around 243p per share in January.

Cairn Energy has tracked lower as hopes of the oil market returning to balance have shrunk. While Brent may have remained stable above the $50 per barrel marker since the start of the year — indeed, the black liquid cost just touched two-month peaks above $56 — data showing workers in the US shale sector stetadily getting back to work has still weighed on the oil sector.

Latest Baker Hughes numbers on Friday showed the US rig count rising for the 13th week in a row. A total of 683 working units now represents the highest since the spring of 2015, and threatens to keep Stateside inventories close to bursting point.

Meanwhile, the EIA said this week that it expects US output to rise by 124,000 barrels per day in May as producers become more economically comfortable operating at current crude prices. If correct, this would represent the biggest monthly jump for two years.

Too much risk

With output also booming from other nations like Brazil and Canada, the impact of swingeing OPEC reductions are proving less-than-effective, to put it mildly. Rather, last November’s supply accord has provided the necessary support for producers elsewhere to fill the output gap.

And this threatens to put the long-term earnings prospects of Cairn Energy and its peers under considerable pressure.

On the one hand the Scottish driller could be considered a more secure bet than many of its peers. As well as sitting on a $335m cash pile as of December, Cairn Energy has $400m worth of debt facilities yet to be tapped. And the company’s gigantic Kraken and Catcher assets in the North Sea remain on track to produce first oil in 2017.

Having said that, I still consider Cairn Energy to be a gamble too far. Not only could massive oversupply in the crude market see the company’s long-term crude price assumption of $70 per barrel miss the target, but the unpredictable nature of oil exploration and production adds another layer of risk for shareholders.

And I reckon further disappointing supply-side news could see Cairn Energy’s share value continue to drop.

Bashed by Brexit?

Serco (LSE: SRP) has suffered no shortage of stock price pain either, the support services provider sinking 22% since releasing worrying full-year financials in late February.

Serco announced that revenues from continuing operations fell 5% last year to £3bn, a result that forced underlying trading profit 14% lower, to £82.1m.

And while the business maintained its full-year sales guidance for 2017, Serco noted that “we think that Brexit offers both risks and opportunities,” adding that “the picture is unlikely to become clear in the short term.”

Business investment in the UK is likely to remain patchy for some time yet as Brexit negotiations continue, a position that could significantly hamper earnings growth at Serco.  And I do not believe these troubles are currently baked into the share price given its massive forward P/E ratio of 43.1 times.

I reckon further weakness could be just around the corner.

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.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Is Rolls-Royce’s share price an irresistible bargain?

Is Rolls-Royce's share price the FTSE 100's greatest bargain today? Royston Wild explains why he would -- and wouldn't --…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is the Vodafone share price a wonderful bargain or a horrible value trap?

As the Vodafone share price continues to fall, is it now a stock to buy with a view to a…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

I’d buy 95,239 shares of this banking stock to generate £200 of monthly passive income

Muhammad Cheema takes a look at how Lloyds shares, with a dividend yield of 5.9%, can generate a healthy monthly…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Can FY results give the Antofagasta share price a long-term boost?

The Antofagasta share price has had a good five years. Now the company says it's set to enter a new…

Read more »

Person holding magnifying glass over important document, reading the small print
Dividend Shares

Can I make sustainable passive income from share buybacks?

Jon Smith notes the rise in share buybacks from FTSE 100 companies, but flags up why they aren't great for…

Read more »

Front view of a mixed-race couple walking past a shop window and looking in.
Investing Articles

After the Currys share price rockets, here are more potential UK takeover targets!

The Currys share price has surged 39% higher in response to news of a takeover bid. Which UK stocks could…

Read more »

Investing Articles

Down 25%, where will the British American Tobacco share price go next?

The British American Tobacco share price has taken a hit. But this Fool isn't deterred. He think's now could be…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

2 cheap dividend stocks I’d snap up in a heartbeat!

This Fool is on the look out for quality dividend stocks and earmarks these two firms as great options to…

Read more »