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Why shares in Micro Focus and this FTSE 100 giant plunged in March

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In an ideal world, private investors taking the responsibility for picking their own stocks would always have time to keep up to date with events in the markets. In reality, it’s easy to get sidetracked by life.

With this in mind, here’s a recap on why the share prices of two of the UK’s largest listed companies dived last month.

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Biggest loser

Software firm Micro Focus (LSE: MCRO) was, by some margin, the biggest faller in the market’s top tier in March. In a absolutely awful few days, 50% of the company’s value was wiped as investors headed for the exits following the release of a gloomy trading update.

In a nutshell, Micro Focus was forced to cut its annual revenue forecast following a reduction in licence income. It now expects this to fall 6-9% rather than the 2-4% originally predicted. Issues relating to its purchase of assets from Hewlett Packard Enterprises were also highlighted. Factor in the resignation of its CEO and a huge drop was somewhat inevitable, particularly given the company’s high valuation immediately prior to the news being released. 

Was the sell-off overdone? Given that the stock had already recovered around 40%, it would appear many investors think so. News that hedge fund Elliott Management has now taken a stake in the company has served to further re-ignite interest in the company (and spark rumours about it being taken into private hands). Trading at a forecast price-to-earnings (P/E) ratio of just 9 for the current financial year ending 30 April, it’s understandable if some contrarians/value hunters feel there is now a sufficiently large margin of safety.

Nevertheless, with revenues falling and debt levels remaining high, I wouldn’t rule out a dividend cut in the near future. A lot of negativity may be priced in but Micro Focus still looks a risky bet for now.

Braced for Brexit

B&Q and Screwfix owner Kingfisher (LSE: KGF) was another casualty in March, with shares falling heavily following the release of its latest set of full-year results. At first glance, this seemed rather unfair.

To summarise, the company reported a 1.3% rise in underlying pre-tax profits of £797m for the 2017/18 financial year — slightly higher than analysts were expecting. At £11.7bn, sales were 3.8% higher.

CEO Veronique Laury said “good progress” had been made during the second of Kingfisher’s five-year transformation plan and that changes were “now visible” across the company’s stores and online. Product ranges had been unified, digital initiatives were “gaining momentum” and efforts to make operations more efficient were beginning to bear fruit.

Despite all this, the home improvement retailer also reflected that performance over the last year had been “mixed“, with difficulties in France offset by the positive performances of its operations in Poland and Screwfix in the UK. Moreover, the outlook for its main markets wasn’t encouraging. While Poland was “supportive“, the UK and France were “more uncertain” and “volatile“, respectively.

Having fallen 15% on the day results were announced, Kingfisher’s share price now appears to have stabilised. The stock changes hands at 12 times forecast earnings and offers a fairly decent dividend of 3.8% for the new financial year.

Forced to make a choice, I’d probably opt for the £6.5bn-cap over Micro Focus. That said, the potential for further volatility as a result of Brexit and reduced consumer confidence can’t be ignored. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Micro Focus. 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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