Is it time to pile in to the BT share price?

G A Chester sees a strong investment case for out-of-favour BT, and an unloved small-cap.

| 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.

Question mark made up of pound symbols

Image source: Getty Images.

Identifying out-of-favour stocks that have strong recovery potential and sound long-term business prospects can produce high returns for investors. With this in mind, I believe there’s compelling value on offer at FTSE 100 telecoms group BT (LSE: BT-A) and small-cap funeral services provider Dignity (LSE: DTY).

Reset

Dignity was at one time a mid-cap FTSE 250 company. After years of delivering handsome rewards for investors, its share price reached an all-time high of about 2,900p three years ago. Currently, the price is just 540p, up 2.4% on the back of today’s trading update.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

What went wrong? In a nutshell, Dignity regularly increased its prices well above the rate of inflation. Ultimately, in the face of rising competition from cheaper and ‘no-frills’ operators, it had to rethink its business and reset its pricing.

Favourable backdrop

Today, the company said: “Funeral market share continued to show a positive response to the group’s updated service offering and price points introduced since January 2018.” The operating performance in the third quarter and year to date was in line with the board’s expectations.

It’s looking like the number of deaths in 2019 (potentially around 577,000) will be the lowest since 2014. However, despite some variance year to year, longer-term run-rate forecasts tend to be reasonably accurate.

On this score, the latest forecasts from the Office for National Statistics – 600,000 deaths in 2020, rising to 740,000 in 2040 – provide a favourable backdrop for Dignity to grow its business.

3 reasons I’d buy

City analysts are forecasting a return to earnings growth (+10%) next year, and the stock can currently be bought for just eight times those forecast earnings. Debt and an investigation into the funeral sector by the Competition and Markets Authority are areas of risk.

However, on balance, the low earnings multiple, the industry’s favourable long-term growth fundamentals, and Dignity’s likely resumption of dividends in due course, lead me to rate the stock a Buy.

Strategy for growth

Like Dignity, BT’s shares were trading a lot higher a few years ago (around 500p) than they are today (190p). Also like the funerals firm, City analysts are forecasting BT to return to earnings growth (+4%) in its next financial year. The stock is trading at a mere 7.7 times forecast earnings.

The company also has a running dividend yield of 8.1%. However, I wouldn’t be surprised to see the payout rebased lower after the current financial year. This is because new management is pursuing a strategy of investing for the long-term growth of the business. In a competitive market, it may require greater investment than currently envisaged. And with the group also having significant debt and pension obligations, a dividend cut may be necessary.

Despite this, and the recently announced loss of a wholesale contract with Virgin Media from the end of 2021, I believe BT’s management is pursuing the right strategy. While there may yet be further short-term pain, I reckon the current low valuation of the stock, the group’s scale, and ownership of both fixed-line and wireless networks, promises long-term gains for patient investors. For these reasons, I rate the stock a Buy at the current level.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

G A Chester 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.

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 considered, so you should consider taking independent financial advice.

More on Investing Articles

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

I bought these 4 cheap shares for a market recovery

After months of sitting on my hands, I've finally taken the plunge by buying four cheap shares. Of course, their…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

Here’s why I’m buying more shares in one of my best stocks to buy!

This Fool explains why he is planning on adding further shares of one of his holdings to boost his portfolio.

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

Just 6% of investment trusts make positive return in H1! What should I do?

The returns from investment trusts have so far disappointed this year. Here's why I plan to continue splashing the cash…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

Could this FTSE 100 stock be a bargain to buy and hold?

This Fool believes there are some excellent bargains to be had on the FTSE 100 and details one he is…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Are these the best income shares to buy in 2022?

Andrew Woods wonders if he should add these two companies to his portfolio to create a consistent income stream.

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

At 41p, are Lloyds shares now too cheap to miss?

As interest rates rise, Andrew Woods asks if now is the time to load up on Lloyds shares.

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

2 dirt-cheap UK shares to buy right now!

Stock market volatility remains very high. This presents excellent opportunities for investors to buy mega-cheap UK shares like these two…

Read more »

Shot of an young Indian businesswoman sitting alone in the office at night and using a digital tablet
Investing Articles

Should I buy soaring Abrdn stock? Or am I too late?

Abrdn stock jumped 8% in Wednesday morning trading. The share price has tanked this year, so maybe its fortunes are…

Read more »