Buying stocks which are unpopular among investors is a relatively risky strategy. In many cases, such stocks have seen their share prices underperform for good reason. This could be a weak outlook, a challenging period for the sector or a difficult macroeconomic outlook. However, such companies are unlikely to remain unpopular in the long run. New strategies, ideas and even personnel can make a difference to their outlooks. Therefore, in some cases they can be worth buying. Does this company fall into that category?
A difficult period
Reporting on Wednesday was developer and operator of power generation plants in India, OPG Power Ventures (LSE: OPG). Its share price has fallen by 50% since the start of the year, with a sharp decline following its first quarter update contributing to its overall slump.
One reason for this is difficult trading conditions for the business. In the first quarter of the year it experienced sustained high seaborne thermal coal prices that have impacted on the sector as a whole. While prices are due to decline in the second half of the year, the company now expects a reduction in earnings for the full year in the absence of a material reversal in the coal price. Furthermore, it is currently experiencing lower average tariffs which are also negatively impacting on its overall performance.
Growth potential?
Despite this, the company’s business model remains robust. It expects a decline in coal prices over the medium term, as well as the anticipated tariff increases being promulgated by the relevant Indian state authorities. Furthermore, strong load factors and an improving sales mix in its customer base also mean it could deliver a turnaround. This could lead to stronger profitability in 2019 and beyond, with a dividend yield of 3.5% having the potential to grow.
However, with such a volatile share price and the potential for more disappointment in the second quarter of the year, there may be better options available elsewhere within the utility sector.
Stable outlook
One potential buying opportunity within the utility industry is water services company Severn Trent (LSE: SVT). It offers a highly defensive and robust business model which could become increasingly popular should uncertainty surrounding North Korea build in future months. It also has less political risk than other utility companies, such as those operating in the domestic energy sector. As such, it may command a premium valuation on a relative basis.
The company is expected to grow its bottom line by 10% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of 1.7, which is relatively low for a utility company. As well as this, it has a dividend yield of 3.9%. Shareholder payouts are due to rise by over 7% next year. At a time when inflation is forecast to increase over the medium term, this could boost demand for the company’s shares. This could make the present time the right moment to buy Severn Trent for the long term.
