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1 FTSE 100 stock I’m avoiding like the plague

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Pearson (LSE: PSON) has seen its share price stage no small recovery in recent months, investors hoping that the FTSE 100 giant is finally past the worst of its long-endured troubles.

The education group has bounced 30% from the troughs set in September but it is still not out of the woods.

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Investors were buoyed by Pearson’s profits upgrade in October thanks to better-than-expected trading in the first nine months of 2017. But the scale of share buying does not reflect the still-frightening trading environment for Pearson as plummeting demand for student textbooks hammers profits. Indeed, the company note in its autumn update that “we anticipate underlying structural pressures in US higher education courseware will persist in the medium term”.

City analysts are expecting Pearson to report a 16% profit fall in 2017, the fifth fall in six years if realised.

And while the abacus bashers are anticipating a mild 1% rebound in 2018, I reckon hopes of any recovery — near term or otherwise — are built on shaky foundations given the colossal structural problems the Footsie business still faces.

Therefore I believe share pickers should leave Pearson well alone despite its low forward P/E ratio of 14.9 times.

Another growth dud

A backcloth of increasing strain on consumers’ wallets is also encouraging me to steer clear of Dixons Carphone (LSE: DC) right now.

Data from the British retail sector has been increasingly depressing as we have moved through 2017 and, in the latest industry gauge before the festive break, the Office of National Statistics (ONS) released another worrying update last Friday.

The body noted that household spending rose just 1% year-on-year during the third quarter, the slowest rate of growth since early 2012. This comes as little surprise as political and economic turbulence bashes consumer confidence, and a combination of booming inflation and stagnant wage growth crimps spending power (indeed, the consumer price inflation  gauge struck a near-six-year top of 3.1% in November).

In this environment one cannot help but worry for the top line at many of the UK’s retailers, and particularly for sellers of big-ticket items like Dixons Carphone. Indeed, earlier this month the business was forced to slice its full-year profits forecasts to £360m-£400m from £360m-£400m made in August, with slow demand for mobile phones one of the problems battering profits performance right now.

Reflecting the FTSE 250 firm’s problems City analysts are forecasting a 26% earnings collapse in the year to April 2018. And in the steadily-worsening retail environment I reckon the number crunchers could crack out their red pens and scribble out their predictions of a 3% bottom-line bounceback in fiscal 2019.

So given the likelihood for extra downgrades to earnings forecasts for the current fiscal year and beyond, I reckon investors should ignore Dixons Carphone’s cheap forward P/E ratio of 8 times — as well as its vast dividend yields of 5.3% and 5.4% for this year and next — and steer well clear.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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