The FTSE committee will publish the result of its latest quarterly index review today. I reckon four companies are set to be kicked out of the FTSE 100. It’s an unusually large number, but perhaps not surprising after the extreme market volatility of recent weeks.
Could these four unloved stocks — or any one of them — be bargain buys today? Or are the flying FTSE 250 firms that will enter the top index in their place better investments?
Ins and outs
The FTSE committee’s decision will be based on the ranking of companies by size, as at the close of the market yesterday. According to my calculations, four FTSE 250 firms — Intermediate Capital, Pennon, Fresnillo and GVC — occupied positions above the 90th rank. This means they’re entitled to automatic promotion to the FTSE 100.
The other side of the coin is that the four lowest-ranked current FTSE 100 companies will be demoted to the FTSE 250. According to my sums, these companies are NMC Health, TUI, Carnival and Kingfisher.
The shares of NMC Health are currently suspended from trading amidst an increasingly embarrassing situation for the London Stock Exchange and regulators. If for any technical reason around the suspension NMC retains its FTSE 100 status pro tem, my sums say Morrisons is in pole position for the axe.
Before coming to the FTSE 100 drop-outs, let’s look at the FTSE 250 companies that are going up.
Alternative asset manager Intermediate Capital isn’t a firm I’m too familiar with, but utility Pennon, gold and silver miner Fresnillo and gaming group GVC are companies I’ve tipped in the past and know to have ‘defensive’ qualities. Such stocks tend to be in demand and perform relatively well in volatile markets.
I see Pennon, Fresnillo and GVC as attractive businesses, but I reckon there could be more value right now among the stocks being kicked out of the FTSE 100.
I’ll pass over NMC, which I wouldn’t touch with a bargepole, and move on to holidays group TUI, cruise ship operator Carnival, and B&Q and Screwfix owner Kingfisher.
Travel and leisure stocks were four of the five biggest FTSE 100 fallers in last week’s 11% market meltdown. TUI was the biggest faller of the lot, down almost 30%, and Carnival was in fifth spot, plunging 19%. Of course, travel and leisure businesses are probably the most heavily and visibly impacted by the spread of the coronavirus.
However, I believe a number of stocks in the sector offer good value for long-term investors. Carnival’s one of those I particularly like. I think its balance sheet is strong enough to help it navigate through what will undoubtedly be a spell of rough seas for the business. Based on the current share price, and past earnings levels to which I’m confident it can return in due course, I’d rate the stock a long-term buy today.
The fall of Kingfisher from the FTSE 100, comes hot on the heels of Marks & Spencer dropping through the trapdoor at the last quarterly review. Some investors have written-off the retail sector completely, but I think there’s selective value on offer. Kingfisher is one I’m watching at the moment. Its annual results are out on 24 March — the day after the index changes to be announced today take effect.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended NMC Health. The Motley Fool UK has recommended Carnival, Fresnillo, GVC Holdings, and Pennon Group. 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.