Plenty of stocks are in freefall at the moment, with the FTSE 100 down more than 12% last year to trade at levels last seen two years ago. Some investors get fearful at times like this, but the wise ones get greedy. Here are two freefallers that could be worth picking up today. Especially since they are offering whopping yields of more than 7%.
Value trap?
Insurance giant Aviva (LSE: AV) has fallen a massive 26% to 371p in the last year, double the fall on the blue-chip index, so it clearly has a few personal problems. In fact, it has underperformed for years now, its shares trading at levels last seen in 2009. This has been a constant source of surprise to me, because it looks so attractive.
I have regularly touted Aviva as an established business offering a highly generous yield for a tempting valuation, and that’s exactly how it looks today. This is a £14.5bn insurance giant, the UK’s largest, selling, motor and pet insurance, critical illness, equity release, and a range of savings products to 15m domestic customers.
What’s going on?
Aviva also insures £490bn worth of assets for 33m customers in Europe, Asia and Canada, yet hasn’t benefited from its global exposure in the same way as rival Prudential has. Today it combines a massive forecast yield of 8.2% with generous cover of 1.9. Yet it trades at just 6.4 times forecast earnings, deep into discount territory. That’s despite healthy earnings per share growth, up 129% in 2017 and a forecast 64% last year, with another 7% expected in 2019.
So why all the red ink? Kevin Godbold reckons the market just does not believe in Aviva, considering it vulnerable to a cyclical downturn. I am reluctant to rush into tipping its stock again, because I’ve been bigging up what may be a value trap for several years, but it still looks jolly tempting.
Off your Marks
Talking of value traps, here comes Marks and Spencer Group (LSE: MKS), which has plenty in common with Aviva. First, it suffered an awful 2018, its stock falling 23%, and now offers a hugely generous yield of 7.5% with halfway decent cover of 1.3. Finally, it is trading at a lowly valuation, of just 9.9 times forecast earnings.
However, there are differences too. While I’m a little baffled by Aviva’s underperformance, that doesn’t apply to M&S. Its food arm may be tasty fayre, but its once mighty clothing operation has been short of style for years, first falling victim to high street rivals such as Gap and Next, and now being punished by the rise of online shopping and the UK retail bloodbath.
Aviva wins
Also, while Aviva’s earnings have been holding up, M&S’s have fallen for the last two years, and are expected to drop a further 13% this year and 1% next. Operating margins have slipped to just 1.5%, but should climb back to 5%.
Peter Stephens reckons its dividend is sustainable, and if Brexit is resolved in the weeks ahead, improved consumer sentiment could register at its tills. Yet for me, Marks lost its spark years ago. I still believe in Aviva, though.
