Investing isn’t just about picking winners, it can also be about picking losers as well. Provided you find the right kind of loser, in other words, one that is ready to launch a fightback. The following three companies have all been on the ropes… can they come out swinging next year?
Capita idea
Outsourcing specialist Capita Group (LSE: CPI) spent most of 2016 drifting slowly downwards until late September, when it suddenly crashed. The culprit was a profit warning, which management blamed on a slowdown in some areas, one-off costs and client hesitation. Its share price has almost halved in just six months to hit a 10-year low.
Investors found succour in Neil Woodford, who, after visiting the company, declared that the market reaction “disproportionate”, but the company’s contract issues will take time to resolve, while its debt pile will continue to rise, on course to hit 2.7 times EBITDA. Bargain seekers may be tempted by its valuation of just 7.7 times earnings and forecast dividend of 5.8%, nicely covered 2.1 times. Earnings per share (EPS) may fall 7% this year but are forecast to rise 3% in 2017, which appears to confirm Woodford’s positive report. Capita looks tempting but beware HSBC’s warning of “high financial gearing, declining sales and a weak growth outlook”. It is also vulnerable to Brexit shocks.
INTU the night
Retail park specialist INTU Properties (LSE: INTU) has done relatively well compared to Capita, its share price down just 16% over the last year. Investors were left deflated by warnings of a slowdown in rental income growth in last month’s Q3 results, but the other numbers looked more positive, with footfall up 1.2% in the UK and 2% in Spain, occupancy rate above 95%, and 67 new long-term leases (61 in the UK and 6 in Spain) for a total of £13m in new annual rents.
So far British shoppers have shrugged off Brexit but Wednesday’s GFK consumer confidence survey showed a five point drop in November, taking it to minus eight. Black Friday disappointed while higher inflation next year could inflict further damage. EPS are forecast to be a positive 3% this year and 2% in 2017. However, the forecast 5.1% yield is covered just 1.1 times, so given its forward valuation of 18.3 times earnings I will do my Christmas shopping elsewhere.
RBS, SOS
Finally, to the mother of all horror stories, Royal Bank of Scotland Group (LSE: RBS), whose problems seem to magnify the further we get from the financial crisis. Today saw another grim tale, as RBS was the only one to fail the 2016 Bank of England banking stress test. There was some good news buried in the report, because the regulator was testing for a worst-case scenario and approved the bank’s remedial action to improve its resilience to financial stocks
Market reaction was relatively muted, the stock is down just over 2% at time of writing, because most RBS investors are braced for bad news. The restructuring and capital position building will continue, and at some point RBS will be a great recovery play — one day. It is tempting at 6.75 times earnings but still only for speculators, or very VERY long-term investors.
