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Could this year’s biggest FTSE 100 fallers be 2019’s biggest winners?

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It’s been a disappointing year for the FTSE 100. The UK’s blue-chip index is currently 12% below the level at which it ended 2017. Of course, the shares of some companies have fallen a lot further. The table below shows the biggest Footsie flops — stocks with the potential to make stunning recoveries in 2019.

  Recent share price (p) 12-month fall (%)
British American Tobacco 2,664 46
Standard Life Aberdeen 236 43
Micro Focus International  (LSE: MCRO) 1,466 39
WPP 816 38
Fresnillo 801 37
DS Smith 309 37
Taylor Wimpey 134 32
Kingfisher 228 32
Just Eat 551 30
Schroders  (LSE: SDR) 2,375 30

In an article last month, I suggested British American Tobacco, Fresnillo and DS Smith are way oversold. I continue to see these stocks as great buys for 2019 — and beyond. But what of the prospects for the others?

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My colleague Paul Summers is happy to avoid troubled advertising giant WPP, and I’m with him on that. I’m also continuing to avoid housebuilders at this stage, because I see their earnings ratings and dividend yields as only superficially attractive. For example, Taylor Wimpey’s shares would need to fall to around 100p — in line with the company’s tangible net asset value — to interest me. The struggling retail sector is another area of the market of which I remain wary. So I’m avoiding B&Q owner Kingfisher, as well as online food ordering platform Just Eat (which will be demoted to the FTSE 250 on Christmas Eve).

Great buy for recovery?

I’m much more positive about the recovery potential of international software group Micro Focus. In September 2017, following the company’s reverse takeover of the software assets of Hewlett Packard Enterprise (HPE), chief executive Stephen Murdoch moved to chief operating officer, with HPE’s Chris Hsu stepping into the chief executive role.

However, Micro Focus issued a profit warning in March this year. At the same time, it announced the resignation of Chris Hsu with immediate effect, and the return of Stephen Murdoch as chief executive. I view this as positive, as I do the company’s explanation for the profit warning. It was put down to what “management believe to be largely one-off transitional effects of the combination with HPE software, rather than underlying issues with the end market or the product portfolios.”

A brief trading update last month encourages me to believe Micro Focus has been stabilised and has a platform for growth. Trading on less than 10 times forecast earnings for the year to October 2019, and with a prospective dividend yield in excess of 5%, I rate the stock a great ‘buy’ for recovery.

Exceptional asset manager

Asset managers, like Standard Life Aberdeen and Schroders, tend to act like geared proxies for the wider stock market. In other words, their shares tend to outperform in rising markets and underperform in falling markets. Generally speaking, I see it as a good strategy to buy into these stocks in the depths of a bear market and sell when their valuations have become stretched (as they tend to at the top of a bull market).

Schroders, which was established in 1804 and remains controlled by descendants of the founding family, is a conservatively-managed business and run with a true long-term perspective. It’s the one asset manager I’d be happy to hold through the cycle, and rate a ‘buy’ whenever I consider the valuation reasonable. That’s the case currently, with it trading on 10.7 times forecast calendar 2019 earnings, with a prospective 4.9% dividend yield.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith, Fresnillo, Just Eat, Micro Focus, and Standard Life Aberdeen. 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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