Why I’d buy Dignity plc over this other contrarian stock

Rumours of Dignity plc’s (LON:DTY) demise are greatly exaggerated, according to this Fool.

| 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.

Contrarian investing — the strategy that seeks to exploit price anomalies by doing the opposite of what everyone else is doing —  requires considerable guts and confidence in your own research. It’s not easy, but that’s precisely why it can be so lucrative.

While it might be prudent to wait for the dust to settle following last week’s news, funeral services provider Dignity (LSE: DTY) is already shaping up to be a prime example of when it might be wise to go against the herd, at least in my opinion. 

To recap, the company announced last Friday that it would be making alterations to its funeral pricing strategy in response to stiffening competition over the last 18 months and “increasingly price-conscious” customers. As a result, it expects cheaper, simple funerals will represent around 20% of all ceremonies it performs in 2018. This development, combined with the need for an additional £2m for digital and promotional activities, goes some way to explaining why the Sutton Coldfield-based business now suspects profits for the new financial year will be “substantially below” previous expectations.

Clearly, this news was never going to be warmly received. Nevertheless, a 50% drop in Dignity’s share price feels excessive given that its response to a shift in the market looks both eminently sensible and decisive. Handled correctly, the overhaul of its online offering and overall branding could be a positive move, particularly as the acquisition-friendly £500m cap’s decision to allow its locations to continue using their local trading names does appear to have restricted the public’s awareness of the business to-date.  

Dignity’s reputation for excellent customer service also can’t be disregarded. While some may be concerned by the lack of barriers to entry, it must remembered that this is a market like no other. The suggestion that people will begin purchasing funeral packages in the same way that they buy insurance (with fairly limited attention paid to the provider) drastically underestimates the emotional aspect of the transaction.

These reasons, coupled with the fact that the strong performance of the company’s pre-arranged and crematoria divisions appears to have been overlooked, make me increasingly bullish on Dignity’s ability to recover.

Less appetising

While confident that Dignity will spring back to life in time, one contrarian ‘opportunity’ I’m more than prepared to pass on is Frankie and Benny’s owner Restaurant Group (LSE: RTN), particularly after today’s rather insipid trading update. Based on initial market reaction, it seems I’m not alone.

Despite making “solid progress” against its strategic initiatives — including re-establishing the competitiveness of its brands, improving the guest experience and growing its pubs and concessions businesses — like-for-like and total sales fell 3% and 1.8% respectively in the 52 weeks to the end of December. The fact that adjusted profit before tax for 2017 is likely to be in line with current market expectations also isn’t saying much given that the latter weren’t exactly high. 

Since January 2016, shares in Restaurant Group have lost just under 65% of their value and currently trade at 12 times forward earnings. Although some may sense value, I continue to be wary, particularly if the company is pushed to further reduce prices as a result of ever-present competition.

When it’s hard to come up with reasons for wanting to visit its sites or purchase its products yourself, a company’s shares are best avoided in my view.

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.

Paul Summers has no position in any of the 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

Investing Articles

Up 23% in a month, can this FTSE 100 stock continue to soar?

Airtel Africa's recently been the FTSE 100’s top-performing stock. With huge opportunities for growth ahead, is it set to continue?

Read more »

Investing Articles

£20,000 in savings? Here’s how an investor could use it to target an eventual £980 of passive income each month

Our writer demonstrates how an investor could aim to earn close to £1,000 each month in passive income from a…

Read more »

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

£10,000 invested in the S&P 500 at the start of 2025 is now worth…

Since the start of the year, the S&P 500's underperformed the FTSE 100. And Stephen Wright thinks investing in the…

Read more »

Investing Articles

Is this a turning point for the Diageo share price?

The Diageo share price is at an eight-year low. Is this FTSE 100 favourite simply too cheap to ignore? Roland…

Read more »

Investing Articles

As the FTSE 100 hits record highs, should I sell my shares and buy an index fund?

Our writer’s portfolio lagged the FTSE 100 last year, but he’s not giving up on stock-picking and highlights a recent…

Read more »

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

£10,000 invested in Lloyds shares 6 months ago is now worth…

Lloyds shares have performed well over 12 months but have broadly disappointed investors over the long run. Dr James Fox…

Read more »

Investing Articles

£20,000 in savings? Here’s how investors can aim for a £4,000 monthly second income

Millions of investors use the Stocks and Shares ISA as a vehicle to build wealth and generate a second income.…

Read more »

Investing Articles

This British wine-producing penny stock might just be vastly undervalued

This penny stock's certainly regained my interest. It's slumped and appears to be trading only at a modest premium to…

Read more »