Provident Financial plc isn’t the only FTSE 250 stock I’m avoiding right now

Shares in FTSE 250 (INDEXFTSE: MCX) firm Provident Financial plc (LON: PFG) have recovered lately but Edward Sheldon isn’t buying just yet.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s amazing how quickly sentiment can change in the investing world. A stock can literally go from market darling to dud in the blink of an eye. Today, I’m looking at two stocks that have done exactly that, and explaining why I’ll be avoiding both for now.

Provident Financial

This time last year, shares in Neil Woodford favourite Provident Financial (LSE: PFG) were changing hands for around 3,000p. The doorstep lender had enjoyed a solid three years of revenue and profit growth, and its share price had surged as a result. With an attractive dividend yield on offer as well, it was a stock that many investors, myself included, viewed in a positive light.

The picture then changed dramatically. Provident released a profit warning in June, on the back of a change in its operating model, followed by another profit warning and a dividend cut in August. Understandably, the market did not like this at all and by late August the shares were trading under 600p. So is there turnaround potential here?

The group released full-year results in February and it appears that it is slowly working through its issues. It recently completed a £300m rights issue and also agreed a settlement with the FCA in relation to an investigation into its Vanquis Bank arm. The shares have moved higher as a result, and now trade at 930p. Is it time to get on on board?

Neil Woodford recently stated that the business “is now on a stable recovery path” and that “the company’s intrinsic value is substantially higher than the current share price would suggest.”

However, I’m not convinced the stock is a ‘buy’ just yet. The full-year numbers made for some pretty awful reading, with adjusted profit before tax falling 67% and adjusted earnings per share declining 65%. No dividend was paid for the year. As a result, I’ll be staying away from Provident for now.

Cineworld

Cineworld (LSE: CINE) is another stock that has lost its shine recently, albeit for completely different reasons. Unlike Provident, business at the cinema operator is actually chugging along quite nicely at present. Full-year results for FY2017 released this morning revealed an 8% rise in group revenue, a 23% surge in profit before tax, and a 12.3% increase in adjusted diluted EPS for the year. So why did the shares fall 30% between late November and late January?

Investors clearly have doubts about the company’s transformational $5.8bn ‘reverse takeover’ of US cinema giant Regal Entertainment Group. While the acquisition has the potential to transform Cineworld into a key global player, the amount of debt taken on for the deal ($4.1bn) is astronomical.

The huge pile of debt means that the combined group’s net debt is expected to be around four times EBITDA. As my colleague Roland Head recently pointed out, that’s well above the 2.5 times level that is considered to be sensible. Debt of that magnitude adds considerable risk to the investment thesis unfortunately, so for now, I’ll be avoiding the shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »