My negative view was based on its seeming inability to find a sustainable growth strategy since its demerger from British Gas plc in 1997 and its awful long-term performance for investors. The share price was around the same level as at the turn of the century, while the 10-year annualised total shareholder return was minus 0.3%.

The return is even worse now, with the shares having collapsed to 139p after a profit warning last week. Nevertheless, on reduced earnings guidance of 12.5p and a maintained dividend of 12p, the P/E is down to near 11 and the yield is up to 8.6%. Is Centrica now a contrarian opportunity?

Multiple headwinds

There’s certainly an argument for income seekers, based on the revised dividend forecasts from several brokers. Goldman Sachs is going for a maintained 12p dividend in 2018 and 2019 with a cut to 9.5p in 2020. Kepler and Investec are both forecasting a cut in 2018, the former expecting not below 10p but the latter a 30% reduction to 8.4p. So, it could be argued that the stock is worth buying today, because even if the dividend were to be cut to as low as 8.4p, it would still give a very decent yield of 6%.

However, Centrica’s earnings appear to be under tremendous pressure. There’s intense competition in its business-facing operations (both in the UK and US), while it’s also losing UK residential customers hand over fist. On top of everything else, UK policy-makers are looking to give regulator Ofgem increased (potentially profit-sapping) powers. In view of these multiple headwinds and Centrica’s record of dismal long-term shareholder returns, I err on the side of continuing to see it as a stock to avoid.

Eyes on the cash

Telematics firm Trakm8 (LSE: TRAK) released its half-year results today, reporting a 125% rise in earnings for the six months to 30 September. Its shares jumped 9% to 150p in early trading but have fallen back to 141p , valuing the AIM-listed company at £50m.

I’ve always had concerns about the ability of this paper earnings-grower to generate meaningful cash, so what caught my eye in today’s highlights was a 2,692% increase in cash generated from operating activities to £3.574m. I’ve had a close look at this. The table below shows some key cash flow numbers for the company’s recent first-half periods.

As you can see, the £3.574m cash flow number highlighted by the company today benefits from a favourable movement in working capital (£0.126m), a bit of interest (£0.014m) and, most significantly, a £1.643m inflow from HMRC. Otherwise, operating cash of £1.791m is only at about the level of two years ago. And would be minimal if £1.756m of development costs (which are rising annually) had been expensed, rather than capitalised.

Until such times as Trakm8 demonstrates it can generate meaningful and increasing cash flows from its business activities, it remains a stock to avoid for me personally.

The post Centrica plc isn’t the only stock I’m avoiding appeared first on The Motley Fool UK.

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G A Chester 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.

Trakm8’s sales rose by 12% in the first half of the year, although its operating profit declined by 61% versus the same period of the prior year. It was negatively impacted by a significantly higher investment in sales, marketing and engineering resource. This amount totalled £1.5m, with Trakm8’s cash flow also being impacted by lower profitability as well as an ongoing move to the software as a service (SaaS) financial model.

Looking ahead, Trakm8’s financial performance for the second half of the year is highly uncertain. The outcome for the full year is highly dependent upon the timing and quantum of contract opportunities, as well as the impact of foreign exchange rate movements. The company has also identified a risk in terms of contracts having the potential to drift into the next financial year. This would cause profits to be broadly in-line with last year on higher sales figures.

Of course, Trakm8 continues to make good progress with its strategy. For example, it has announced a new contract win today with Smart Driver Club and has its largest ever pipeline of substantial new contracts in place. Furthermore, the investment it is making today in its sales, marketing and engineering resources could improve its financial performance and help to reverse the decline in investor sentiment seen today.

In fact, Trakm8 is expected to deliver a rise in earnings of 15% in the 2018 financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.7, which indicates that now could be a good time to buy it. While share price falls may be on the cards in the short run, Trakm8 could deliver high returns for patient, long term investors.

Despite this, Trakm8 remains a relatively high risk technology company. Therefore, more risk averse investors may prefer to buy a better diversified, more financially sound technology company such as Micro Focus (LSE: MCRO). It has increased its bottom line at an annualised rate of 22.5% during the last five years. This has allowed Micro Focus to raise dividends per share by 127% during the same time period.

There is more potential for dividend rises in future years, since Micro Focus currently pays out just 44% of profit as a dividend. Therefore, while its dividend yield of 2.8% is relatively low, it is likely to rise in future years. This provides evidence of its financial strength and stability, with the acquisition of HPE adding to Micro Focus’s long term profit potential. As such, and while Trakm8 has clear growth potential which makes a worthwhile buy, Micro Focus offers lower risk and high potential rewards.

The post Why has Trakm8 Holdings plc slumped by a third today? appeared first on The Motley Fool UK.

More reading

• How to target a million-pound SIPP by investing in UK shares
• Buying £20k of BAE Systems shares could give me a £360 income this year!
• Trying to make a million from FTSE 100 shares? Here’s where to start today
• How the UK State Pension measures up against other countries — and why it’s not enough
• A stock market crash this summer? Here’s how it could help

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Micro Focus. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.