Today I am looking at three downtrodden FTSE darlings that could be poised for a sizeable bounceback.
Microchip builder ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) has been one of the largest FTSE 100 fallers during the past month, the stock having given up a hefty 10% since the middle of June. But with shares now at their lowest since January I fully expect bargain hunters to charge in.
It is certainly true that slowing premium smartphone demand in Western markets remains a concern — both Samsung and HTC have sounded sales warnings in recent months, while fears of tablet PC saturation is adding to ARM Holdings’ woes. Still, the relentless march of gadget heavyweight Apple is helping to assuage fears of a hard revenues landing for the Cambridge firm, while diversification into the hot networking and servers market is also beginning to pay off.
Consequently the City expects ARM Holdings to record earnings growth of 73% and 20% in 2015 and 2016 correspondingly. While P/E multiples of 32.5 times for this year and 27.5 times for next year may not be the most attractive readings pick in town, PEG numbers around the value benchmark of 1 through to the close of 2016 underline ARM Holdings’ decent price relative to its growth potential.
Like ARM Holdings, shares in engineer GKN (LSE: GKN) have suffered torrid time during the past four weeks, the company having dived 11% to eight-month troughs during the period. While slowing car demand has cast doubts over the Redditch firm’s top line — the China Association of Automobile Manufacturers cut its 2015 growth forecast to 3% from 7% previously this month — I believe the long-term fundamentals of this market remain as strong as ever.
Indeed, I reckon a backcloth of rising populations and personal affluence levels in developing markets should drive motor sales through the roof in the years ahead, while improving economic conditions in Europe and North America should keep unit sales ticking higher, too. On top of this, GKN’s top-tier supplier status for the likes of planebuilding giants like Boeing and Airbus should also power revenues higher amid improving profitability across the airline sector.
Current headwinds in major markets are expected to push earnings 9% lower in 2015, although a 9% recovery next year should herald steady growth further out. These projections leave GKN changing hands on ultra-cheap P/E ratios of 11.8 times and 10.7 times for these years — well below the watermark of 15 times that indicates stellar bang for one’s buck — while projected dividends of 8.9p per share for 2015 and 9.6p this year produce handy yields of 2.8% and 3%.
Unlike the firms I have mentioned above, I am not so optimistic over the long-term prospects for pump builder Weir (LSE: WEIR). The stock has fallen 14% since mid-July, hitting its cheapest since autumn 2012 in the process. And I fully expect prices to keep ploughing lower as weak commodity prices slam demand for the Scottish firm’s mining- and oil-related products.
The Brent crude benchmark slipped to within a whisker of $56 per barrel just last week and, with support finally broken following months of floating around $60, fears are growing that prices could plummet once again in the coming months. With the West edging closer to a deal with Iran over the country’s nuclear programme, fresh amounts of supply could wash into the market. Meanwhile, the latest Baker-Hughes data last week showed the number of rigs operating in the US begin to rise once again.
As a result the analysts expect Weir to endure a third successive earnings dip in 2015, this time to the tune of 33%. Such a figure leaves the business changing hands on a P/E rating of 16.6 times, hardly catastrophic on paper but unjustifiable in my opinion given the obvious lack of growth drivers. With the business nursing a huge debt pile in excess of £860m, and revenues set to slack for some while yet, I also believe a prospective dividend of 45.2p per share — yielding some 2.8% — can be taken with a pinch of salt.
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Royston Wild owns shares of GKN. The Motley Fool UK has recommended ARM Holdings and Weir. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.