The latest FTSE quarterly index review is coming up next week on 3 June. It’ll be based on the ranking of companies by size at the close of the market the day before. As things stand, no fewer than four stocks are set to be kicked out of the FTSE 100.
Carnival, Meggitt, Centrica and easyJet all currently occupy automatic relegation spots. Meanwhile, the flying FTSE 250 firms set to replace them in the top index are Avast, GVC, Homeserve and ConvaTec. Are there any bargain buys among the fallen Footsie stars and newly-minted blue-chips in waiting?
FTSE 100 volatility
The FTSE 100 and other markets have been extremely volatile in recent months. One-day movements of 20%+ in company share prices haven’t been unusual. It’s been like a game of snakes and ladders.
The positions of the players could yet change by the close of the market a week today. However, the current standings certainly reflect some of the major sector themes of the coronavirus crisis.
Travel and leisure has been one of the hardest-hit industries. As such, I’m not surprised to see cruise ship owner Carnival and airline easyJet poised to crash out of the FTSE 100.
On the theme of the dry-up in global air traffic, engineering group Meggitt has warned of a significant reduction in demand across its civil aerospace business. Meanwhile, Centrica’s status as a ‘defensive’ utility hasn’t stopped its share price plunging. The British Gas owner has long been a troubled company, and the coronavirus-induced oil price crash hasn’t done its upstream oil business any favours.
By contrast, the FTSE 250 firms set for promotion can be seen as beneficiaries of the lockdown and other impacts of the pandemic. Homeserve sells cover for unexpected plumbing, heating and electrical emergencies. GVC is a betting and gaming group. ConvaTec makes ostomy and other medical devices. And Avast is a consumer cybersecurity company.
As Bryce Elder over at FTalphaville wryly commented last week: “UK PLC’s top tier will be swapping international travel and essential home comforts for gambling, incontinence and monetisable paranoia. That feels appropriate for 2020.”
FTSE 250 flyers
Among the promotion candidates, I’ve written bullishly on GVC and ConvaTec in the last couple of years. However, their share prices were considerably lower than today. At current levels, I see these two as ‘holds’.
I don’t think I’d be chasing Homeserve at today’s price either, but Avast looks very promising to me. I feel a rating of below 20 times forecast earnings is cheap for a tech-sector company that’s the global leader in its niche (consumer cybersecurity). As such, I rate Avast a ‘buy’.
FTSE 100 fallers
Potentially, the FTSE 100 relegation candidates could be bigger bargains. All four have lost well over 50% of their value in recent months. So there’s potential upside of 100%+.
A bull case can be made for them. For example, my Foolish colleague Roland Head recently assessed the prospects of easyJet and Carnival. He concluded “easyJet shares look good value at under 600p,” but “Carnival is a little riskier”.
I find it difficult to get enthusiastic about Centrica. Meggitt is my ‘long-term buy’ pick of the four companies. Sure, reduced demand in civil aviation is a headwind right now, but Meggitt’s a diversified conglomerate and key supplier in its industries. I reckon its long-term future is bright.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Carnival, Homeserve, and Meggitt. 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.