Investors bought Ocado anticipating strong growth tomorrow, rather than profits and dividends today. Yet their enthusiasm has faded, with the Ocado share price down 53% over 12 months. It’s now one of the worst-performing FTSE 100 shares, rather than the best.

There’s no dividend and most years Ocado makes a loss rather than a profit, and now investors are fretting over when those profits will arrive.

I’d buy one of these FTSE 100 shares

UK supermarket rivals are catching up in online fulfilment, and Amazon remains a constant threat. Inflation is also squeezing grocery market profitability. The UK government’s mooted online sales tax wouldn’t help either. 

Most FTSE 100 shares face a list of challenges, but Ocado’s are mounting. It still boasts cutting edge pureplay technology. Bumps in the road were supposed to be expected, but it looks too risky for me to buy right now.

Mining giant Anglo American (LSE: AAL) thrashed most FTSE 100 shares over the last five years. It came in second place with a total return of 283%. The last year has been strong too, as it returned another 16.3%.

Like all commodity giants, this £43.37bn stock is benefiting from today’s soaring raw material prices. However, its share price slumped last week when it reported a 10% drop in first-quarter output. It blamed Covid-related staff absences, high rainfall in South Africa and Brazil, and problems at its metallurgical coal and iron ore operations.

I reckon this could also be a buying opportunity, with the stock trading at just 7.8 times earnings. It also offers a juicy 6.6% yield. 

The strict Chinese Covid lockdown could hit demand and prices, as we’ve seen with the falling copper price. Yet Anglo American remains one of my favourite FTSE 100 shares, and I’m sorely tempted by today’s low valuation.

A company with pricing power

Real estate investment trust Segro (LSE: SGRO) doesn’t always get the limelight. Yet it’s the third-best performer among FTSE 100 shares measured over five years. It delivered a total return of 223% and continues to race along, up 37.9% over the last 12 months.

Segro owns, manages and develops modern warehousing and light industrial property, and recently reported a strong first quarter. Total new headline rents signed during the period jumped to £25m, up from £18m last year,

Supply chain and inflationary pressures could hamper its construction plans and drive up costs. Yet management reckons it can pass this to customers in higher rents. Today’s yield may look low at 1.79% but board recently hiked its full-year dividend by 10%. Further progression seems likely. The downside is that the stock is expensive, at 41.8 times earnings. That’s the price investors pay for buying market-beating FTSE 100 shares like this one.

I wouldn’t buy Ocado, but I would place Segro on my watchlist. Of these three FTSE 100 shares, dirt-cheap Anglo American is the one I’d buy today.

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Harvey Jones doesn’t hold any of the shares mentioned in this article. The Motley Fool UK has recommended Ocado 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.

As you can imagine, the stock isn’t without risks.

Hammered

This morning Hammerson published its half-yearly unaudited results after a tough year that has seen its share price almost halve to 265p. In February last year the £2bn real estate investment trust (REIT) dropped out of the FTSE 100 as investors recoiled at its move to snap up rival Intu, which they saw as doubling down on its exposure to struggling shopping centres.

The UK’s traditional bricks and mortar retail sector is under massive pressure as it struggles to keep up with the online shopping phenomenon, and Hammerson is responding by overhauling its business and making disposals, which totalled £456m over the period, 90% of its 2019 target of £500m. It is committed to the sale of UK retail parks over the medium term and made disposals of £33m in the first half.

This has cut debt to £3.1bn with gearing 61%, despite the fact that deals are taking longer in the current “tough environment”. 

CEO David Atkins said with high street fashion under pressure it is shifting towards categories with greater customer appeal and rental growth potential, with more than 90% of new leasing to leading consumer and food and beverage (F&B) brands.

Delivering the goods

Performance was stronger in Ireland and France than in the UK, “which demonstrates the benefits of our diversified portfolio”. However, it hasn’t given up on the UK, submitting planning applications for Martineau Galleries in Birmingham and The Goodsyard in Shoreditch.

The £2bn group trades at just 9.6 times forecast earnings, adding a bargain valuation to its dizzying yield (covered 1.1 times). The share price is now at a whopping 60% discount to net asset value, which suggests a real opportunity, but with net rental income down 12.3% to £156.6m, investors are shying away. Hammerson is a risky recovery play that could pay off if we get a positive Brexit resolution and consumer confidence rebounds. That still leaves the internet shopping problem, though. Another danger is that further write-downs are a possibility.

Segro grows

All is not lost in the property sector as fellow REIT Segro (LSE: SGRO) has been booming, its share price up 20% in the last six months, and 120% over five years.

Last week, it reported “another period of strong performance with good earnings momentum driven by rental growth, active asset management and a record level of developments”, as its portfolio of “high quality and well-located warehouse assets” enjoys low vacancy rates and is benefiting from the surge in online shopping.

Adjusted pre-tax profit rose 19% to £131.8m, with profit before tax at £410.8m, as the online retail revolution drives up demand for its warehouses. The £8.6bn group boasts a strong pipeline of developments and acquisitions and increased its interim dividend by 13.5% to 6.3p.

The Segro share price currently trades at 7.3 times earnings and although the yield is much lower than Hammerson’s, a forecast 2.6% with cover of 1.2, investor demand remains strong with the REIT trading at a relatively small 15% discount to net asset value. Segro looks the more attractive bet, despite its dramatically lower yield.

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Harvey Jones has no position in any of the 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.

The story now is that they’re too scary, given the twin risks of Labour renationalisation and the spread of solar panels and wind turbines across the UK.

Renationalisation and renewables are both real risks. But history suggests that many such risks turn out to have been exaggerated. Even if the problems are real, good businesses often find solutions that enable them to evolve and profit from the new reality.

Time to buy?

I think we could be approaching a situation like this with the big energy utilities, such as SSE.

For many obvious reasons, I can’t rule out political risk. But I am pretty confident that as the UK’s largest renewable generator, SSE’s portfolio of power assets is likely to remain useful and profitable over the coming years.

The group failed to merge its retail business with that of Npower, but it remains a sizeable operation that generated an operating profit of £122m last year. Efforts are continuing to “secure the best future for the business outside SSE”. I believe an opportunity will be found, perhaps in combination with a smaller energy retailer with a sharper focus on marketing.

What about the dividend cut?

I think it’s probably fair to say that utility stocks became overvalued a few years ago. The dividend also became unsupportable. Both of these problems have now been corrected, in my view.

SSE’s share price has fallen by about 30% in three years. This year will see its dividend cut by 18% to 80p per share, but profits are expected to return to growth, improving the safety of the dividend.

The stock is trading on about 12.5 times 2019/20 forecast earnings, with a dividend yield of 6.9%. I think this could be a smart time for income investors to buy.

I shouldn’t have sold

I’ll start with a confession. I bought shares in FTSE 100 warehouse property REIT Segro (LSE: SGRO) in early 2013, at less than 250p. Today they’re trading at about 770p, with a dividend that’s 50% higher than when I bought.

Unfortunately, I don’t own these shares anymore. I sold them in a mistaken bout of portfolio restructuring back in 2017.

However, even though I really like the long-term investment story around logistics property, I’m not tempted to buy back my Segro shares today.

At the current price, the stock trades at a 14% premium to its net asset value of 673p and offers a forecast dividend yield of just 2.6%. In my view, these aren’t attractive numbers.

Wait

Although I recognise that there’s strong demand for well-located warehouses, trees don’t grow to the sky. At some point I’m confident that this cyclical market will slow.

Buying shares in a property company at a premium to their net asset value doesn’t make sense to me. It means that when the market cools, your downside risk is much greater.

I’m not tempted by the yield, either. The FTSE 100 offers a dividend of about 4.3% at the moment. So if I just wanted a simple low-risk income, I’d invest in an index tracker instead.

In short, I like Segro’s business but not its valuation. I plan to wait for a cheaper opportunity to buy. For now, I’d rate SGRO as a hold.

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• How much do you need in a Stocks and Shares ISA to target a £1,200 a year passive income?

Roland Head has no position in any of the 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.

By contrast, a number of FTSE 100 dividend stocks appear to offer impressive risk/reward ratios for the long term. In fact, within the property sector itself, there appear to be a number of potential bargains that could yield high income returns and capital growth, while also offering tax advantages when invested in through a Stocks and Shares ISA.

British Land

The recent pullback in the British Land (LSE: BLND) share price means that the real estate investment trust (REIT) has a dividend yield of around 6%. This suggests that investors are factoring in potential risks across the commercial property sector.

While this may be warranted as a result of the pressure that exists on retailers in particular, British Land is seeking to pivot towards office space and residential units over the medium term. This could reduce its reliance on retailers, and may provide it with a brighter long-term growth outlook.

Certainly, the outlook for the UK economy is highly uncertain at the present time. Weaker growth and the potential for downbeat consumer confidence could put greater pressure on a variety of industries. However, with British Land trading on a price-to-book (P/B) ratio of just 0.6, it seems to offer good value for money. This suggests that as well as a high income return, the stock may offer an impressive rate of capital growth in the long run.

Segro

While British Land may be adapting to a changing retail environment, warehouse provider Segro (LSE: SGRO) could benefit from an increasing shift towards online shopping. As consumers continue to use their computers and increasingly their mobiles to buy a variety of goods online, demand for large warehouses is forecast to increase. This could provide the company with a tailwind that allows it to generate improving financial performance in the long run.

While the stock’s current dividend yield of 2.8% may be significantly lower than many other FTSE 350 REITs, it has the potential to increase its bottom line at a relatively fast pace in the coming years. This could lead to a faster rate of dividend growth than among its sector peers, which could increase investor interest in the stock.

With Segro appearing to have a sound strategy and trading on a P/B ratio of around 1.1, it seems to offer a favourable risk/reward ratio. As such, it could offer higher returns than a buy-to-let investment, while also providing greater diversity and lower overall risk due to its range of assets and strong financial standing. Because of this, I think now could be a good time to buy it.

The post Forget buy-to-let! I’d buy these FTSE 100 dividend stocks in a Stocks and Shares ISA appeared first on The Motley Fool UK.

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Peter Stephens owns shares of British Land Co. The Motley Fool UK has recommended British Land Co. 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.

Astra’s most attractive quality is the fact that this company is a world leader in the pharmaceutical space, and is currently pushing out some of the most revolutionary treatments for cancer around.

For example, last weekend, the company revealed data at the American Society of Clinical Oncology, showing that its flagship cancer treatment, Imfinzi could prolong the lives of lung cancer patients whose disease had reached the third stage.

On top of this, today, Astra announced that its blood cancer drug, Calquence, showed meaningful improvement in patients with lymphocytic leukaemia when compared with a chemotherapy-based treatment. 

A world-leader

These positive developments only served to reinforce my view that Astra is a giant force in the battle against cancer, and the revolutionary treatment should guarantee an income stream for many years to come. Indeed, after several years of stagnation, City analysts expect the company to return to growth this year.

Analysts have pencilled in normalised earnings per share of $3.60 (283p) for 2019, putting the stock on a forward P/E of 21.2. As the company puts more treatments on the market, analysts are expecting further growth in 2020. The City has pencilled in earnings growth of 19.6% for the year, leaving the stock dealing at a 2020 P/E of 17.8.

This valuation looks a bit on the expensive side, but I think it is a price worth paying for the company’s growth and leading position in the global immuno-oncology market. On top of Astra’s growth potential, investors can also look forward to a dividend yield of 3.6%, covered 1.3 times by earnings per share, that’s before taking into account the City’s earnings growth forecasts for the next two years.

Proven value creator

The second business I’m going to profile has established itself as one of the best property companies UK investors can own over the past few years. The company I’m talking about is FTSE 100 commercial real estate REIT Segro (LSE: SGRO).

Segro owns and manages warehouse properties across the UK and Europe. Demand for these properties has boomed in line with the growing demand for online shopping, and the company has wasted no time in making the most of this opportunity.

Over the past six years, book value per share has increased by around 17% per annum as the enterprise has acquired new properties with reinvested earnings and additional cash from shareholders. And as the portfolio has grown, so has the company’s dividend.

As a REIT, Segro has to distribute the majority of its rental income from warehouse properties to investors as a property income distribution. For 2019, analysts reckon the company will distribute a total of 19.9p to shareholders, giving a dividend yield of 2.8% at the time of writing.

This level of income might not seem that attractive at first, but over the past five years, Segro’s distribution to shareholders has increased by approximately 60%. If the business continues to expand as it has done since 2013, I believe the payout will grow a further 60% over the next five years, potentially giving investors buying today a dividend yield of nearly 6%. This dividend growth potential is the reason why I’m recommending Segro as an income stock you can buy and hold forever.

The post 2 FTSE 100 world-beating income growth stocks I’d buy to hold forever appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended AstraZeneca. 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.

Eye, eye

This is lower than last year’s total return of 24%, or £1.42bn, but is still a strong performance. The group’s net asset value per share now stands at 815p, up from 724p one year ago, and that’s after paying 37p of dividends in the year.

3i makes its money through buying companies, building them up and selling them on, which means results can swing from one year to the next depending on factors such as disposals. This year its private equity business delivered a gross investment return of £1.15bn or 20%, driven by its biggest investment Action, as well as Cirtec Medical, Audley Travel, Aspen Pumps and Formel D. Realisations remained strong, with total proceeds of £1.24bn before reinvestments.

Tough times

The group’s infrastructure business “had another outstanding year”, generating a total shareholder return of 33% due to good underlying portfolio performance and realisation from the sale of Cross London Trains (XLT) for £333m.

CEO Simon Borrows said the group will remain a disciplined investor in “very competitive markets” while warning of “significant political and market uncertainty and a growing tide of funds looking to invest in our markets”.

Proceed with caution

3i remains cautious as a result, and is careful about the pricing of new investments, while looking to deploy further capital in companies it already knows. That may partly explain the relatively sober market response to another strong year.

Kevin Godbold has admired the group’s dividend record, with payouts growing around 290% over the past six years, while its share price is up 175% over five years, thrashing the 6% return on the FTSE 100. Trading at 7.7 times forecast earnings, it is one of the cheapest stocks on the index, although the price-to-book ratio may be a better measure for this company and that looks a bit toppy at 1.5. Like Borrows, I’d be a bit cautious about the next year or two but the long-term still looks good.

Segro slows

Warehouse property specialist Segro (LSE: SGRO) is another FTSE 100 company that has really outperformed, its shares rising 107% over the past year. This real estate investment trust provides big-box warehouses for online retailers and has a strong development pipeline with more than 40 sites under construction.

It has slipped lately, however, with headline rents and new pre-lets both falling, no doubt a sign of our slowing economy. As Roland Head recently pointed out, Segro has been using its funds to pay down debt rather than reinvest in the business, which suggests it could be concerned about slowing growth.

Wait a bit

Its stock also looks worryingly expensive at a current forward valuation of 28.4 times earnings, while the forecast yield of 2.8% with cover of 1.2 isn’t enough to compensate.

Segro operates in what has been a strong growth area so it could be one to watch once the economic outlook becomes clearer, but as consumers retrench and Brexit drags on, there are better uses for your money right now, I reckon.

The post One income and growth stock I’d buy today, and one I wouldn’t appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the 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.

I also want to consider another FTSE 100 property firm whose rapid growth has made it the UK’s largest Real Estate Investment Trust (REIT).

Are we near the top?

Warehouse property specialist Segro (LSE: SGRO) has played a blinder by focusing on providing the large logistics properties needed by fast-growing online retailers. Segro’s share price has doubled in the last five years, during a period when many listed property stocks have flatlined, or fallen.

However, trees don’t grow to the sky. This booming market must slow at some point. News from Segro this week suggests to me that this time is approaching. The value of new leases signed during the first quarter was £21.2m, 22% lower than during the same period last year.

Although chief executive David Sleath says that although political risks are a concern, he’s confident of continued growth. But after raising £451m from shareholders to fund new opportunities in February, he’s decided to spend about £270m repaying some of the firm’s debt a year early.

The firm may simply be planning to refinance this debt at lower cost. But it may also be a proactive move by Sleath to reduce Segro’s gearing, ahead of a possible slowdown in growth.

I don’t like the price

In either case, Segro shares currently trade at a premium to their book value of 650p per share, and offer a dividend yield of just 2.9%. In my view, this isn’t an attractive entry point for a long-term property investment. I think the shares look fully-priced and could be heading for a retreat. I’d prefer to invest in a company that’s currently out of favour, despite having high-quality assets and a generous dividend yield.

A rare opportunity?

One of my top picks in the property sector is Landsec (LSE: LAND), the FTSE 100 REIT previously known as Land Securities. This group owns a large portfolio of prime London office space, along with major shopping centres and retail parks across the UK.

Although retail is out of favour at the moment and rents are falling, Landsec’s centres are major destinations with a good mix of tenants. The firm also has a growing number of leisure tenants, such as bowling alleys and cinemas. Demand remains strong for such activities.

Landsec’s share price has fallen by more than 30% from the highs seen in 2015, leaving the stock trading at a 34% discount to its book value.

It’s worth remembering that although Landsec did cut its dividend during the financial crisis, the firm maintained a payout. It also has an unbroken record of dividends stretching back to at least 1992, the earliest date for which I could find records.

In my view, this dividend stalwart is hard to fault. At about 910p, Landsec shares offer a forecast dividend yield of 5.1%. To me, this contrarian buy looks a much better option than chasing the tail end of the warehouse boom.

The post 1 FTSE 100 5% dividend stock I’d buy for my ISA today appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Landsec. 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.

Segro growth slows

It is down 1.5% today on publication of its trading update covering 1 January to 16 April, which showed a slowdown in new headline rent growth and secured new pre-lets, although chief executive David Sleath said the business continued to perform well during its first quarter.

New headline rents totalled £21.2m, down from £27.3m in the first quarter of 2018, while secured new pre-lets slipped from £23.3m to £11.1m over the same period (although they remain well above the three-year quarterly average run rate of £7m).

Lease it out

Sleath hailed “particularly strong” rent roll growth at £6m, up from £500,000, boosted by the re-gearing of a number of leases in its Heathrow portfolio. The group now has 44 projects under construction, which are expected to generate £57m of annualised rent and are already 72% leased.

Segro raised £451m of equity in February to add to its future development pipeline, while it has a number of additional pre-let development projects at advanced stages of negotiation. Sleath said the group’s high-quality portfolio of assets in prime locations across the UK and continental Europe should “continue to benefit from the structural drivers of e-commerce and urbanisation,” despite macroeconomic and political risks.

Healthy pipeline

With vacancy rates falling to 4.4% (against 5.2% in December), lettings of both existing and recently completed speculative space are strong. Segro completed 100,000 square metres of developments in the quarter, capable of generating £3.8m of headline rent when fully let, with £2.8m already secured.

So why was the market response downbeat? I reckon it’s partly down to the high valuation, with the stock trading at 28.4 times earnings. Paul Summers identified the same problem in February. Also, the yield disappoints at 2.9%, covered 1.2 times, although management policy is progressive. Segro is a good business, but it doesn’t look a great investment at today’s price.

That’s the spirit

That said, a toppy valuation and low yield does not necessarily make a stock a no-go area. You only have to look at FTSE 100 listed spirits giant Diageo (LSE: DGE) to counter that. Its P/E is routinely in the mid-20s, while its income rarely rises above 2.5%. It is the same story today, as the stock trades on a forecast valuation of 24.5 times earnings while the forecast yield is just 2.2%, with cover of 1.9.

You may have to be patient if you want a better entry point. Diageo is expensive because investors like it, and it usually lives up to expectations. 

After a spell in the doldrums, Diageo is up 60% over the past three years. It has also beaten the FTSE 100 with ease and Peter Stephens reckons it will continue to do so, citing strong growth prospects in China and India. EPS are expected to rise 9% this financial year and 7% next year, which is more than steady, and offers security against wider stock market jitters. This is exactly the type of stock you should be looking to buy amid a wider market correction.

The post The Diageo share price and this growth monster are thrashing the FTSE 100 appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. 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.

While I can’t see this momentum being lost anytime soon, the question — from a Foolish perspective — is which UK-listed stocks are likely to give the best return? 

With a portfolio of property stretching across the UK and Europe, one candidate is FTSE 100 real estate investment trust SEGRO (LSE: SGRO).  

Today, the company reported a 24.4% rise in adjusted pre-tax profit in 2018 as a result of “high customer retention rates, like-for-like rental growth and a low vacancy rate.” At 650p per share, SEGRO’s net asset value was also a little under 17% higher than at end of 2017 (556p).

According to CEO David Sleath, the business now possesses a “portfolio of very high quality and well-located warehouses” and currently has 1.3m sqm of projects “under construction or in advanced pre-let discussions.” Once completed, these are forecast to return £46m in rent (almost 75% of which has already been secured).

Sleath added that SEGRO’s pipeline and land bank have “substantial potential” — an understandable comment given the company also chose today to announce it would be attempting to raise around £450m to fund new developments.

Some decent numbers and an encouraging outlook. What’s not to like from an investment point of view?

Well, having rallied strongly since the beginning of 2019, you’ll now need to pay 26 times forecast earnings to secure SEGRO’s stock. With a trailing yield of just over 2% following today’s 16.7% rise to the final payout (to 13.25p), dividends are certainly going in the right direction, but may not be sufficiently large for some wishing to generate an income from their portfolios. 

With Brexit on the horizon, I’d be looking for a cheaper entry point. One for the watchlist for now? 

Another option

If Segro doesn’t take your fancy (and you’re looking for better cash returns) then another real estate investment trust, Tritax Big Box (LSE: BBOX), might be a suitable alternative.

Having already secured tenants including Amazon, Argos and B&Q, the FTSE 250 constituent also appears determined to keep expanding its portfolio.  

On Monday, Tritax announced that it had raised roughly £250m to fund the purchase of a 87% stake in logistics business db Symmetry and that this is now expected to complete next Tuesday. According to non-executive chairman Sir Richard Jewson, this acquisition should allow Tritax “to continue to deliver strong earnings growth and a progressive dividend policy as well as significant valuation gains as these assets move through development to become income producing.“

Still 12% below the price high hit last July, shares in Tritax currently trade almost 19 times expected earnings in 2019 — not screamingly cheap, but certainly far more attractive in valuation terms than those of its larger industry peer. A forecast dividend of 5.1% is also more generous.

Full-year results are due next month. Based on the market’s reaction to SEGRO’s stellar set of numbers this morning, I can’t see the shares rocketing anytime soon. For those looking to build a diversified portfolio of income-generating holdings, however, I certainly think Tritax warrants attention.

As I commented earlier this month, there are worse destinations for your cash at the current time. 

The post This FTSE 100 growth stock just announced a 24% rise in profits. Here’s why I’m not buying yet appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the 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.

As well as a slowdown in new business, profit margins are also coming under pressure. Operating costs increased 19% during the period, more than revenues, which only grew 9%, leading to a reduction in the overall operating margin of 400 basis points.

Unfortunately for investors, I think this could be just the start of a much more severe downturn for Hargreaves. The company is one of the most profitable in the asset management space, having achieved an average operating profit margin of around 60% for the past five years. In comparison, wealth managers and stockbrokers such as Charles Stanley and Rathbone Brothers report operating margins in the region of 10% to 25%. 

Granted, there are some significant differences between these companies’ business models, which means old-school brokers such as Charles Stanley have higher costs and thinner margins, but Hargreaves has come under attack repeatedly in the past due to the high fees it charges to customers.

Further to fall

I think customers are now starting to wake up to the firm’s above-average charges and this could mean the end of Hargreaves’ sector-leading margins. And as margins fall, I reckon it is going to become harder and harder for the stock to hold its elevated valuation.  

Shares in Hargreaves are currently trading at a forward P/E of 29, almost double the banking and insurance sector average. With this being the case, I think the stock could fall by 50% or more in 2019 if the bad news continues.

But Hargreaves isn’t the only FTSE 100 stock that I’m avoiding in 2019. I reckon shares in Segro (LSE: SGRO) could also be in for a hard time.

Getting ahead of itself

Segro is one of the UK’s largest listed real estate investment trusts (REITs). The company owns a portfolio of properties in the UK, primarily warehouse properties. Recently, as the country gears up for Brexit, investors have rushed to buy the shares because Segro is one of the few companies that are likely to benefit from the divorce as businesses use its warehouses to stockpile products, in an attempt to minimise disruption in the event of a no-deal Brexit. The rush to buy has sent the stock surging by 10% since the beginning of the year.

However, following this rally, the stock is now trading at a premium of around 8% to its last published net asset value of 603p per share.

With this being the case, I think it’s going to be difficult for the stock to advance any further, and the shares could even fall back to the net asset value if we get a Brexit deal and the demand for storage space falls. 

A dividend yield does sweeten the deal here, although, at just 2.8%, I don’t think it is enough to offset the potential capital losses investors could suffer.

The post Watch out below! I think these FTSE 100 stocks could collapse in 2019 appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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.