This FTSE 100 stock has plunged 13% today! Is it a buy on dip?

This FTSE 100 stock crashed by 13% after it released its trading update. But is the update really that bad? And is this an opportunity to buy?

| 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.

sdf

A dip in FTSE 100 stocks’ prices can be a great opportunity to buy shares I want in my investment portfolio, at a relatively low price. But sometimes dips can also be red flags, especially when the broader markets are doing well. So I find it instructive to dive into the stock’s particular story to understand what is really happening and what my next steps should be. 

Pearson drops on trading update

This is the case for the learning company Pearson (LSE: PSON). The share price has dropped a huge 13% in today’s trading so far, following the release of its trading update. The company has shown a 10% increase in underlying revenue for the nine months ending 30 September, compared to the year before. In itself, this does not sound too bad a growth rate. It is, however, a slower growth than the 17% seen for the first half of the year. This possibly explains investors’ disappointment in the results.

The upside to the FTSE 100 stock

But the fact is, that Pearson’s revenues have been declining for years now. Between 2016 and 2020, they fell by almost 25%. So I am not particularly discouraged by the latest slowing down in growth. In fact, it is a good sign that its revenue is actually growing at all. It has also reported a reduction in net debt, which I think is a positive for all companies, especially while there are still risks to the global economy. 

I also like that its biggest revenue generating segments have seen strong growth. Its ‘Assessments and Qualifications’ segment, which accounts for around 35% of its total revenues, has managed to maintain healthy growth despite some softening in the latest quarter. Its growth up to September is at 24% for the nine-month period. 

Positive changes for the safe stock

The company is also in the process of reinventing itself for the digital world, stepping away from its reliance on traditional education-related publishing, with the Pearson+ app. Since its launch in July, it has registered 2m users, which is encouraging. It remains to be seen whether the company will thrive with this change in track, but it does seem like a step in the positive direction. 

It is also a stock for the risk averse. If there were to be a recession in the future, demand for educational products and services is likely to be affected in a limited way. So buying the Pearson stock can be a good way to diversify my portfolio. Also, it pays a dividend. Its yield is not high at 2.7%, but I don’t mind an extra bit of cash coming in either.

Somewhat pricey

I think its price-to-earnings (P/E) ratio is high at close to 20 times. The average P/E for the FTSE 100 index is at around 15 times, so this is clearly significantly above that. There are a number of other stocks that have similar or lower earnings ratios but have at least in the recent past performed quite well, including miners, and non-essential retailers. To that extent, I think its attractiveness is diminished. 

What I’d do

All things considered though, I will wait for its detailed set of results before taking a call on whether to buy the stock or not, never mind the dip.

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.

Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Pearson. 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

Close-up as a woman counts out modern British banknotes.
Investing Articles

I slashed my monthly expenses by £300 to help me aim for a steady second income stream of £20k

This Fool's saving an extra £300 a month and investing it in a portfolio of dividends stocks to power his…

Read more »

Workers at Whiting refinery, US
Investing Articles

Come on Shell! Here’s why you could consider buying BP shares…

Following takeover speculation, James Beard’s put together a letter to Shell’s boss explaining why the energy giant could consider buying…

Read more »

National Grid engineers at a substation
Investing Articles

National Grid shares: a £1,000 investment 5 years ago is now worth…

National Grid shares are on the rise! Here’s how much money investors have made so far… and how much they…

Read more »

Close-up of children holding a planet at the beach
Investing Articles

Vodafone shares: a £1,000 investment 5 years ago is now worth…

Vodafone shares have underwhelmed since 2020, but could the stock be on the verge of an explosive comeback? Here's what…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

Investing £1,000 in BT shares 5 years ago: here’s how much could have been made…

BT shares are on the rise as the company steers itself towards £2bn of free cash flow generation by March…

Read more »

Woman riding her old fashioned bicycle along the Beach Esplanade at Aberdeen, Scotland.
Investing Articles

£100,000 invested in Tesco shares at the start of 2025 is now worth…

Tesco shares are on the rise as the UK's leading supermarket continues to dominate, but how much money have investors…

Read more »

Abstract 3d arrows with rocket
Investing Articles

This UK growth share turned £1,000 into £5,000!

Contrary to popular belief, there are some phenomenal UK growth shares capable of delivering game-changing returns just waiting to be…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

£10,000 invested in Scottish Mortgage shares 3 years ago is now worth…

Scottish Mortgage shares reflect the value of their holdings, and over the past three years the trust has performed rather…

Read more »