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BT Group and Royal Mail shares have tanked. What’s the best investment strategy now?

BT Group (LSE: BT.A) and Royal Mail (LSE: RMG) shares are widely held in UK investor portfolios. Yet both stocks have been terrible investments recently. Over the last three years, BT’s share price has fallen 60%, while Royal Mail shares have declined 62%. Have these dramatic share price falls created buying opportunities? Here are my thoughts.

BT Group

BT is a stock that I have been warning investors about for a while now. For example, when I last covered it on 19 June (when the share price was at 210p) I warned that the company’s balance sheet was a problem and that its dividend looked unsustainable. I also noted that analysts were downgrading their earnings forecasts, which I thought may put downward pressure on the stock. Overall, I said that BT shares were best left alone. That was definitely a good call, as the shares have fallen 23% since then. 

Today, at 162p, my view on BT remains the same, despite the fact the shares trade at a ridiculously low P/E ratio of 6.7. One reason I’m bearish on BT is that the group is going to have to spend an extraordinary amount of money on full-fibre broadband rollout and 5G infrastructure in the years ahead and this is likely to put pressure on earnings and dividends. Just recently, chief executive Philip Jansen said the company may consider cutting the dividend “in a year or two.”

In addition, analysts continue to downgrade the stock. For example, Deutsche Bank recently said that BT is one of the “least attractive” telecommunications companies in Europe and cut the stock from ‘hold’ to ‘sell’. Add in the company’s toxic balance sheet and its huge pension deficit, and the picture just gets worse. All things considered, BT shares are best avoided in my view, despite the stock’s low valuation.

Royal Mail

Royal Mail is another stock that I have warned investors about in the past. When I last covered it in mid-October last year I said that the dividend was at risk of a cut and that the shares looked “quite risky.” Since then, the dividend has been cut 40%, and the shares have lost 44% of their value.

Like BT, Royal Mail now trades at a very low valuation – its P/E is just 8.1. That’s way below the average FTSE 100 P/E ratio. However, despite this rock-bottom valuation, I don’t see any investment appeal in the stock at present.

For starters, capital expenditure (capex) over the next five years is going to be high (£400m-£500m on top of annual ongoing capex of £400m), which makes the investment case less appealing. Secondly, earnings are declining. Last year, adjusted earnings per share fell 33% and this year, analysts expect a drop of 21%. Third, return on capital employed (ROCE) is shockingly low, averaging just 4.2% over the last three years. High-quality companies generally sport ROCE figures of 15% or higher.

Weighing everything up, Royal Mail is another stock to avoid right now, in my view. I think there are much better stocks to buy at the moment.

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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.