Why I’m avoiding these cheap shares

Low-cost airline EasyJet (LSE: EZJ) is arguably having one of its worst years — its shares are trading at three-year lows, having almost halved in value over the last 12 months. The FTSE 100 budget airline was flying high last year, with its shares trading at all-time highs of 1,915p, but they have since fallen back to just 989p, the company’s performance having suffered as a result of industrial action, terror attacks and exchange rate fluctuations.

In its most recent update, for the last quarter of its financial year, the Luton-based carrier said it had delivered record passenger numbers and higher load factors during summer trading, with a significant reduction in its cost per seat over the three month period ended 30 September.

Passenger numbers over the period hit a record 22 million with a strong load factor of 93.9%. EasyJet said that its customers had benefitted from lower fares right across its network, with revenue per seat decreasing by 8.7% on a constant currency basis compared to the same period a year earlier.

Currency woes

The airline has, however,  grown capacity by 6.1% over the three month period and is continuing to deliver its strategy of enhanced long-term competitive advantage, through building leading positions at key airports in its core summer beach routes and its European City network.

EasyJet admits that strong currency fluctuations since the result of the EU referendum have had significant adverse effects on performance, with foreign exchange rate movements now expected to have a negative impact of around £90m compared to FY2015, an increase of £35m since the 23 June Brexit vote.

After hefty falls this year, the shares are trading on a cheap-looking price-to-earnings ratio of just nine, with bargain hunters perhaps looking to take a contrarian approach. But broker consensus suggests underlying earnings will shrink by 22% for fiscal 2016 and by a further 15% next year, and I would rather wait until growth starts to appear on the horizon.

Cheap, but not a bargain!

Oil and gas engineering firm Amec Foster Wheeler (LSE: AMFW) is another London-listed firm facing tough trading conditions of late. The FTSE 250 firm has been suffering a share price slump since the summer of 2014 when it reached all-time highs of 1,262p, but the shares are now changing hands at just 416p. The fortunes of oil and gas engineering firms are heavily tied to the oil price, with companies such as Amec feeling the effects of reduced capital investment in infrastructure after the recent oil price slump.

Amec is, however, taking positive steps to turn things around, such as making cost savings, and continuing its expansion into renewable energy, and this will no doubt help the company’s bottom line over the long term.

But, for now, analysts expect the firm’s profits to keep falling at least until a recovery in the oil price prompts the industry to significantly increase capital investment. In my opinion Amec’s battered shares still don’t represent good value given the gloomy outlook.

A better alternative

If you're looking to make serious capital gains from shares, then you’ll want to read this FREE report from the experts at The Motley Fool, who’ve uncovered A Top Growth Share that’s already delivered a 400% gain in the last four years.

To reveal the Top Growth Share simply CLICK HERE.

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