Is it time to rescue these out-of-favour stocks?

Fashion and homewares retail giant Next (LSE: NXT) has experienced a dramatic fall from grace in recent times after what can only be described as a series of unfortunate events. It all began at the start of the year when the company reported a disappointing set of results for the fourth quarter of its last financial year, blaming unusually warm weather in November and December. The weather was beyond its control but it also admitted to poor stock availability hitting its key Next Directory online operation. By the time full-year results were announced in March, the shares had already slipped from all-time highs of £80.15 in December to £66.60, but the worst was yet to come.

Margins squeezed

In March, the Leicestershire-based retailer delivered a satisfactory set of full-year results with total group sales rising 3% to £4.15bn and underlying pre-tax profits up 5% to £821.3m. But the big news was the company’s cautious outlook, with management warning that the year ahead could be the toughest since 2008. This sent the market into a panic, with Next losing 15% of its value on the day of the announcement.

Finally there was of course the shock result of the EU referendum in June, with the post-Brexit panic leading to a sell-off that left the shares sinking to three-year lows. In September, the company may have announced better-than-expected interim results, with a rise in overall revenue. But margins were squeezed as sales of marked-down items had outperformed fully-priced items, resulting in lower pre-tax profits.

Does this all suggest Next is on a slippery slope downwards? Well the retailer has bounced back from tough times before and personally I don’t believe the outlook for the firm is as gloomy as the current share price suggests. Analysts are predicting a steady rise in revenues, albeit at a slower rate, and low-single-digit earnings growth for the medium term. It can’t be denied that the FTSE 100 retail giant is experiencing a tough trading environment, but after a 40% share price decline over the last 12 months, and a price-to-earnings ratio of just 11 for the current year, it looks good value. Just as its products have been sold at markdown prices, this could be a chance to snap up its shares at a discount too. I think Next could be a recovery play for patient investors with a longer-term view.

Shrinking earnings

Another well-known company suffering heavy share price declines this year is international transport group Stagecoach (LSE: SGC). The group’s share price fell off a cliff back in December after the Paris terrorist attacks discouraged people from travelling, and this in turn led the company to revise its full-year earnings downwards. After shedding 14% of its value on the same day, the shares continued to slide until the results of the EU referendum when another sell-off ensued.

Sometimes events such as these can lead to buying opportunities for brave investors looking to take advantage of market over-reactions. And Next is a good example of that. But I don’t believe this is one of those occasions for Stagecoach. Its shares are trading at a 40% discount to a year ago and look very cheap at just eight times earnings for the current year. But the outlook isn’t so rosy for the Perth-based company, with earnings expected to shrink by 10% this year and another 6% next year. I’d stay away from Stagecoach for the time being as those shrinking earnings could indicate a value trap.

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