Shares in Thomas Cook (LSE: TCG) have produced one of the worst performances on the London market in 2018. Year-to-date shares in the holiday business are down nearly 64%, underperforming the FTSE 100 by 56% over the same period.
A series of profit warnings have been behind the decline. An unseasonably warm summer in the UK hit demand for overseas holidays, and now the group is paying for it in lower expected profits.
Analysts believe the company will now report profit before tax for the full year of around £150m, down from the previously expected £200m.
In my view, the market’s reaction to this downgrade has been too severe. The sell-off has pushed the shares down to a valuation of just five times forward earnings, which seems too low for a business that still has a leading position in the UK holiday market. What’s more, an improvement in bookings for summer 2019 should see investors return to the company. If and when they do, it looks as if the stock has the potential to triple from current levels as the rest of the sector is trading at a forward P/E of 15. This level of reward is certainly worth the risk, in my opinion.
Founder return
Superdry (LSE: SDRY) was flying high at the beginning of this year. The casualwear fashion retailer seemed immune to the rest of the retail sector’s woes, and investors were willing to award the stock a high multiple as a result.
Unfortunately, the positive sentiment hasn’t lasted. Year-to-date, the stock is down around 60%. The company’s problems are two-fold. Julian Dunkerton, Superdry’s co-founder, has been a vocal critic of the current management, which has shaken investor confidence. At the same time, a profit warning last month showed investors that Superdry is as not as invincible as it once appeared to be.
I’m hesitant to recommend buying the shares at this level for both of these reasons. I’ve never been an expert in fashion and today’s retail environment only makes trying to understanding the outlook for the sector more complex.
With this being the case, even though the shares are trading at a historically cheap forward P/E of 8.9, I’m not rushing to buy. I’d like to see some signs of a recovery before making a move.
Looks too cheap
Indivior (LSE: INDV) is another stock that looks cheap on a historical basis, but I’m inclined to avoid due to its mixed outlook.
Right now, shares in the pharmaceutical business are changing hands for just 10.2 times forward earnings, compared to the pharmaceutical sector average of 16, which looks cheap at first glance. However, City analysts are expecting earnings per share to slide by nearly 50% over the next two years.
In some respects, this is a conservative estimate because new competitors are edging in on Indivior’s key opioid treatment market all the time. And the company is having to fight increasingly hard to maintain its market share.
With this being the case, even though the business looks cheap after the recent decline (the stock is down 60% over the past five months), I think the shares deserve a low valuation considering the uncertain outlook for the business. Therefore, I rate Indivior as a ‘sell’.
