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Why I think the Morrisons share price is an opportunity to play the FTSE 100’s crash

The fall in the FTSE 100 since may 2018 has been significant, with the index declining by around 15%. While this is not yet bear market territory, a downward trend suggests that further volatility may be ahead in the near term.

Among those shares to have fallen in recent months is Morrisons (LSE: MRW). The retailer has been hurt by investor sentiment towards the wider sector coming under pressure as consumer confidence has weakened ahead of Brexit. But this could represent a potential turnaround opportunity. Alongside another recovery stock which reported news on Thursday, Morrisons could be worth buying in my opinion.

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Improving prospects

The company in question is technology-based engineering solutions specialist Costain (LSE: COST). It released a trading update for the 2018 financial year, with it continuing to perform well in the second half of the year. It has made further progress on its strategy as it seeks to differentiate itself from peers through its long-term strategic relationships and technology-enabled services.

It has finished the year with an order book which stands at a record level of £4.2bn. Its net cash position of £110m suggests that it has the financial strength to continue to invest in its product offering during what remains an uncertain period for the wider sector.

With Costain’s share price having fallen by 29% since May, it now trades on a price-to-earnings (P/E) ratio of around 9. This suggests that it may offer a margin of safety. With earnings growth of 6% forecast for the current year, it could deliver improving share price performance over the medium term.

Turnaround potential

As mentioned, Morrisons has experienced a challenging period. Its shares are down by 20% in the last four months, with investors becoming increasingly concerned about the outlook for UK retailers. Consumers seem to be cautious about spending, and this may be due to fears surrounding the performance of the UK economy post-Brexit. Although employment levels have been high for a number of years, political risks could weigh on business confidence over the coming months. Therefore, it would be unsurprising for an increasingly price-conscious consumer to emerge.

Competition within the supermarket sector is already high. However, Morrisons appears to have a sound strategy which is delivering improving sales and profitability. For example, it is focusing on growing its wholesale operations as it seeks to leverage its status as a major food supplier. This could provide it with access to growth in the convenience store segment. And with it seeking to boost customer retention through loyalty schemes, it could improve its competitive advantage versus peers.

Since the company now has a P/E ratio of around 16 and is forecast to post high single-digit profit growth in the next two years, it could offer good value for money. With debt levels falling and the potential for further special dividends, the stock may provide recovery potential over the long run.

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Peter Stephens owns shares of Morrisons. 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.