I like to think of myself as a contrarian investor, one who targets out-of-favour FTSE 100 stocks in the hope of buying them cheap and benefiting when they recover.
The following three UK blue-chips are the worst performers of the past 12 months. So should I buy them today?
The three biggest FTSE 100 flops are Fresnillo (LSE: FRES), Croda International (LSE: CRDA) and RS Group (LSE: RS1). I don’t hold any. What kind of contrarian am I?
Swimming against the tide
Fresnillo is the biggest fallout on the index over the last year, down 35.38%. Investors who bought the world’s largest silver miner haven’t exactly struck gold. The Mexico-focused miner has been hit by the resurgent peso, which smashed dollar revenues, as well as rising labour, electricity and diesel costs. First-half profits crashed 69.2% to $47.9m.
What happens next largely depends on interest rates. Rocketing bond yields have increased the opportunity cost of holding gold and silver, hitting demand. In a further blow, precious metals are priced in dollars, and the resurgent greenback makes them more expensive to foreign buyers.
Given these headwinds, there’s a strong contrarian case for buying Fresnillo. But with interest rates set to stay ‘higher for longer’, I think now may be a little too soon.
Global speciality chemicals company Croda is the second worst FTSE 100 stock over 12 months falling 28.94%.
In July, it reported a 21.9% drop in first-half sales to £880.9m, with profit before tax crashing 79.8% to £128.7m.
CEO Steve Foots pinned this on the unprecedented “speed and scale of the post-Covid stocking and subsequent destocking”. Despite falling margins, the board held the dividend at 47p, “reflecting confidence in future performance”.
Unfortunately, customers haven’t finished destocking yet, and this will weigh on second half performance. Croda is cutting costs to protect profitability and, once again, the turnaround looks set to take time. I expected a cheaper valuation than 17.4 times earnings but, like Fresnillo, I’m keeping my eye on this one. There’s an opportunity here.
They’re still making money
Shares in industrial and electronic equipment supplier RS Group are down 27.24% over the last year, due to challenging market conditions. Yet it’s hardly a disaster zone, with full-year adjusted profit before tax up 17% to £390.7m on a like-for-like basis, and the dividend hiked 16%.
Q1 revenue was “marginally softer than anticipated” due to weaker purchasing manager index (PMI) data, a soft electronics market and tough comparatives. RS Group is also at the mercy of FX movements, with every 1 cent movement in the euro having a £2.1m impact on annual adjusted profit before tax.
RS Group now looks cheap, trading at 11.37 times earnings, and is possibly the most tempting of the three. CEO Simon Bryce says it’s responding to the downturn by managing costs while continuing to make strategic investments for the future.
All three FTSE 100 underperformers offer modest dividends with Fresnillo yielding 2.58%, Croda 2.25%, and RS Group 2.83%. They’re now on my watchlist.
They all require a wider recovery in sentiment that could take time, but I buy shares with a minimum five-year view, so it’s less of an issue. With markets set for a bumpy October, I might buy them if their share prices dip, or crash, because that’s what contrarians do.
