Even though the FTSE 250 at an index level gained during 2024, this doesn’t mean all stocks on its platform did. Some performed poorly, which could continue in 2025. Here’s one share that’s been flashing red flags at me to end the year.
Recruitment in focus
I’m talking about SThree (LSE:STEM). The share price for the stock’s down 33% over the past year. Let’s first run through what the business does and how it makes money.
SThree is a multinational recruitment company that specialises in headhunting for STEM (science, technology, engineering and mathematics) industries. By placing candidates at companies, it generates placement fees.
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The recruitment model has been proven over many decades. I don’t dispute that. But for SThree, a recent profit warning flagged several reasons why now might not be the best time to invest.
Worrying factors
The specific trading update mentioned that group net fees for the full year would be down 9% versus last year “against the backdrop of ongoing challenging market conditions”.
Another factor for poor performance was the “increased political and macro-economic uncertainty”, which SThree said slowed down decision making when it came to new hires.
Finally, there were further concerns as the “labour market is undergoing changes driven by new technology and new ways of working“.
Unfortunately, I think all of these factors are going to persist into 2025. For example, the increase in political uncertainty. Germany and France will likely have new elections next year. The US inauguration will happen in late January. There’s plenty of scope for issues relating to politics spilling over for SThree.
When it talks about changes to the labour market with new technology, part of this is likely referring to some human jobs being cut due to artificial intelligence (AI) use instead. If this trend continues (I think it will) then SThree will generate lower revenue due to less hires needed.
A cheap consideration
It doesn’t surprise me that the share price dropped substantially based on this recent update. Yet even with that reduction, I still think it has further to fall next year.
Some will disagree with me. The fall in the stock has meant the price-to-earnings ratio’s now just 6.63. This could indicate that it’s undervalued in comparison to my fair value benchmark of 10. Further, SThree has a good spread of placement fees around the different sectors. So even if technology suffers, the other areas could help to offset this slack.
Even with these points, I’m still concerned that the reasons being flagged as a cause for concern right now are only just beginning. With the rise of AI, heightened political issues and general challenging conditions for recruitment, 2025 could make things a whole lot worse.
On that basis, I’m staying well away and feel it could be a really poor performer over this period.
