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Why Now Is The Time To Cash In On Tesco PLC, Centrica PLC And BHP Billiton plc

Today I am looking at three big-cap plays in danger of experiencing severe price weakness.

Tesco

Shares in Tesco (LSE: TSCO) have taken a step back during the past week, but giddy investor sentiment means that the stock is still dealing 16% higher from the start of the year. However, I believe that the embattled firm could experience fresh pressure after its recent results underlined the problems it still has to overcome.

The business posted a record £6.38bn pre-tax loss for the year ending March 2015, shocking even the most pessimistic of City analysts and reflecting huge writedowns in the value of its property and an increasingly-competitive trading environment. With all of the UK’s premium, discount and middle-ground retailers all expanding furiously, and Tesco needing to keep on slashing prices just to stand still, it is hard to see how the Cheshunt firm will return to the black any time soon.

But even if the number crunchers are correct — Tesco is anticipated to recover from this year with a 5% bottom-line improvement — this figure still leaves the chain dealing on a P/E multiple of 23.3 times prospective earnings, sailing well above the benchmark of 15 times which represents attractive value for money. I would consider a number closer the bargain-basement standard of 10 times to be a fairer reflection of Tesco’s travails, and reckon shares could fall back to reflect this if the retailer fails to show a marked turnaround in the near future.

Centrica

Unlike Tesco, shares in electricity and gas play Centrica (LSE: CNA) have leapt higher during the past month after a steadily trending lower for more than 18 months now, and have gained 16% in just over six weeks. And the firm has gained further traction after chairman Rick Haythornthwaite mentioned that the firm has made provisions for a potential takeover approach.

However, Centrica’s interims this week revealed that a depressed oil price means that it has maintained the gloomy profit projections it published in February — the British Gas operator noted that “improved year-on-year profitability downstream [is] expected to be more than offset by the impact of lower commodity prices on the upstream business.”

The City expects Centrica to record a 6% earnings slide in 2015, although this still leaves it changing hands on a reasonable P/E multiple of 14.7 times. But with regulatory pressures and the rise of smaller, independent energy providers raising questions over its long-term profitability, and oversupply in the crude market on course to worsen further and drive Brent still lower, I reckon that Centrica could endure fresh share price pain looking ahead.

BHP Billiton

Diversified mining play BHP Billiton (LSE: BLT) continues to suffer from insipid demand across a multitude of its key markets. So even though shares have edged 10% higher during the past fortnight, I believe that the prospect of metals prices weakening further is likely to dampen investor appetite again sooner rather than later.

In the critical iron ore sector alone — an area from which BHP Billiton sources more than half of all earnings — Morgan Stanley noted today that recent Chinese stimulus measures have helped boost prices of the steelmaking ingredient more recently. But with mill activity in the country expected to slow in the coming months, and swathes of low-cost material poised to hit the market, this bounce is likely to prove a short-lived phenomenon.

City consensus suggests that BHP Billiton will record an eye-watering 42% earnings slide in the current year, leaving the business dealing on a P/E rating of 16.3 times. Although this multiple is not eye-wateringly terrible, I reckon that the very real prospect of further downgrades this year and beyond could drive the ratio sharply higher.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.