Differentiating between the two is very important! Here’s one stock I think looks undervalued, but another I’m very cautious about.

Building on the future

Let’s start with the company I believe is undervalued: Travis Perkins (LSE:TPK). It’s down 18% in the past month, but up 11% over a broader one-year period.

The hit in the past month came mostly from the release of the company’s full-year results. It showed trading conditions remain subdued, with weak housing activity dragging on demand for building materials. Revenue dipped by 0.9% and adjusted operating profit fell 12.5%, and the group swung to a £97m loss after impairment charges and restructuring costs piled up.

Even though housing activity remains a risk going forward, I think this could just be a dip in the share price. For one, the balance sheet has improved dramatically. The firm has moved into a net cash position for the first time in decades, giving it resilience and flexibility. Free cash flow has also come in stronger than expected, which matters far more than accounting losses over the long run.

Further, we shouldn’t forget this is still a highly cyclical business. If the conflict in the Middle East ends and UK interest rates fall later this year, consumers should feel more confident, helping to boost the construction and housing markets. This should then translate to a meaningful rebound in volumes and investor sentiment.

Therefore, I see the stock as undervalued given where it could be trading by the end of the year, and feel investors could consider buying it.

No recovery signs yet

On the other hand, I’m continuing to stay away from recruitment firm Hays (LSE:HAS). A month ago, I wrote about the company, which was trading at the lowest level in decades. Yet I decided it wasn’t the right time to buy, which was a good call, as the stock’s down 17% over the last month. It’s down 59% in the last year.

Right now, the job market’s weak for Hayes. Economic uncertainty across Europe, particularly in key regions such as Germany and the UK, is dampening hiring activity. And when hiring slows, recruiters like Hays feel it almost immediately.

Yet it’s not just about waiting for a recovery in the labour market. Hays is struggling on other fronts, with news at the end of February that the CEO would be stepping down, alongside poor financial results. The company has even slashed its dividend by 84%, never a signal that things are going smoothly.

It’s true that Hays hasn’t lost its relevance. It remains one of the largest recruitment firms in Europe. It has a strong global footprint and deep relationships across industries. When hiring eventually recovers, I expect the stock to bounce back. However, from where I’m currently standing, I still believe there’s further room for the stock to fall before I want to buy.

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Time for a new job

I’m talking about Hays (LSE:HAS). The recruitment company is down 53% over the past year, with 25% of that coming in just the past month.

The company’s core problem is that the hiring market has weakened sharply. Given that its revenue is tightly linked to hiring activity, this isn’t good. As a result, the half-year results released last month showed net fees fell by 9% versus the same period last year. Operating profit was down by 21% in what the CFO described as “a backdrop of continued macroeconomic and political uncertainty”.

Adding to the short-term woes was news that the CEO had suddenly stepped down, along with an 84% cut in the dividend. The dividend news obviously frightened away a lot of income investors. As for the CEO news, it’s not a good look for the future direction of the company if the key leader is changing unexpectedly.

The problems have pushed the stock down to 35p, the lowest level since the early 1990s.

The outlook from here

To begin with, I noted down the current analyst ratings for the company. Of the 11 contributors I can see, the average target price for the coming year is 63p. The highest comes from Citibank, with a forecast of 90p. Interestingly, there are no target prices below 35p. This is a strong indication from experts that the recent fear about the stock is misplaced.

Another fundamental reason why I could consider buying is that the job market is cyclical. Over the decades, it has gone through good times and bad times. Right now is a bad time. But with a long-term investment view, I’m confident the market will improve in the coming years. As the UK economy recovers, with inflation hopefully continuing to fall and interest rates coming lower, it should act to kickstart economic growth. In turn, this should give employers more confidence to go out and hire.

Risks ahead

On the other hand, the stock could fall further before any recovery takes shape. The business needs to find a new CEO, and the immediate forecast is for continued fee revenue decline due to the weak outlook. Therefore, until the company can get back on its feet or can prove some catalyst for growth, I struggle to see why the share price will stop falling.

When I add everything together, I do think it’s a stock that can rally in the long term. However, I’m not convinced that right now is the best time to buy, so I will add it to my watchlist and look to revisit in a month’s time.

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Therefore, unsurprisingly, it was badly affected by the pandemic. However, once lockdown restrictions were eased and employers started hiring again, things started to improve. During the year ended 30 June 2022 (FY22), year-on-year revenue increased 29.5%. And basic earnings per share grew 151%.

But as post-Covid inflation started to soar and interest rates across the world were hiked, business confidence began to drop once more.

More recently — since June 2024 — the Hays share price has tumbled 31%. The October 2024 budget, which increased employer’s National Insurance – and the National Living Wage — has led to a sharp drop in hiring both in the temporary and permanent markets.

To compound matters for the group, the uncertainty surrounding US tariffs and the possible impact on the global economy has also affected confidence.

FY25 pre-exceptional operating profit is expected to be around £45m. This is lower than the £56.4m analysts were forecasting. During FY24, it was £105.1m. The short-term outlook’s also gloomy. The company’s most recent trading updated warned that “we expect current challenging market conditions to persist into FY26”.

Light at the end of the tunnel?

Despite recent overseas expansion, the UK and Ireland remains the group’s biggest market. Here, domestic unemployment’s currently 4.6%. The Office for Budget Responsibility’s forecasting this will drop to 4.3% by the end of 2026, and to 4.1% by the last quarter of 2027. This offers some hope for the recruitment sector although it must be said that economic forecasting is notoriously difficult.

But Hays is optimistic. The company talks of “when” the labour market will recover rather than ‘if’. Indeed, history tells us that unemployment is cyclical in nature and that the jobs market experiences peaks and troughs like all others.

And in my opinion, Hays looks well positioned to benefit should events take a turn for the better. It operates in 33 countries and covers a variety of professions, client sizes and job types. It has over 56 years of experience and has successfully navigated worse downturns before.

An uncertain future

But it’s unclear to me how it will cope with the challenge of artificial intelligence (AI). McKinsey & Associates reckons 30% of US jobs could be automated by 2030. Goldman Sachs estimates that half of American roles won’t require humans by 2045. It could be a similar story in the UK.

Scaremongering, perhaps, but there’s a lot of evidence to support Amara’s law, which states: “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run”.

There’s also uncertainty over the future direction of the UK economy. Interest rates aren’t falling as quickly as most had predicted and the next budget could see further tax increases.

Based on amounts paid over the past 12 months, the stock’s currently (25 June) yielding an above-average 4.5%. But I wouldn’t be surprised if the group’s final payout for FY25 was cut when its final results are announced in August.

And while I don’t think AI’s much of a threat just yet, it’s definitely looming on the horizon.

For these reasons, taking a stake in Hays would be too risky for me.

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But I’ve noticed a few warning signs that this might not last. And as someone who’s heavily invested in the UK stock market, this makes me nervous.

Disappointing earnings

For example, last week (11 October), Hays (LSE:HAS) — “the world’s leading recruitment experts” — issued a downbeat trading update.

During Q3 2024, net fees were down 15%, compared to the same period in 2023. The fall was 20% in its UK/Ireland division. Worse, permanent employment income suffered a 21% drop.

Market conditions were described as “tough”, with companies taking longer to hire.

And even though I don’t own shares in Hays, I believe its results are a warning sign that the UK economy might not be in a good state. I think the performance of recruitment agencies is a barometer for the health of the wider economy. If business leaders don’t have confidence they’re not going to hire new staff.

Of course, it may be the case that Hays is unrepresentative of the market.

However, Page Group — another FTSE 250 recruitment company — painted a similar picture in August, when it reported its half-year results to 30 June 2024. It said the market was “tough” and reported a 13.1% fall in revenue. Basic earnings per share fell 61%.

Falling out of fashion

The luxury goods market is also showing signs of struggling.

This is often the first to be affected when there’s trouble ahead. Burberry issued a profits warning in July and replaced its chief executive. Aston Martin Lagonda has cut its sales forecast this year by 1,000 cars.

If that wasn’t enough, the nation’s finances appear to be in bad shape.

According to the Institute of Fiscal Studies, the Chancellor might need to fill a ‘black hole’ of anything up to £25bn, when she delivers her first budget on 30 October.

The Guardian claims that the Treasury is modelling an increase in capital gains tax of up to 39%. But this could encourage investors with deeper pockets to take their money elsewhere.

To add to the gloom, the Prime Minister’s refused to rule out an increase in employer’s national insurance contributions. There’s even talk of a ‘windfall tax’ on Britain’s banks. Whatever the rights or wrongs of these policies, they’re not going to boost investor sentiment.

To compound matters, figures released on 11 October show that the UK economy is growing, but not by very much.

There’s too much despondency around for my liking.

Does it really matter?

However, many academic studies have found there’s little correlation between economic growth and the performance of the stock market. In fact, Jay Ritter of the University of Florida, found an inverse relationship.

Alex Bryan looked at returns from 1988 to 2015, in 41 countries. His findings support Ritter’s conclusion (see chart below).

Indeed, UK equities are dominated by the FTSE 100, whose members earn approximately 70% of their revenue from overseas. This helps mitigate any issues caused by problems back home.

It sounds as though I’m guilty of over-thinking things. I need to remind myself that successful investing requires taking a long-term view and ignoring the ‘lumps and bumps’ that come along from time to time.

The post Some warning lights are flashing red for UK shares! appeared first on The Motley Fool UK.

I’ve thought of buying this one at different points in the past couple of years, and the news made me raise my eyebrows a bit.

Profit warning

The firm, in the specialist recruitment business, issued a profit warning.

There’s been a slowdown in the jobs market, which maybe shouldn’t be too much of a shock considering the year we had in 2023.

Hays says there was “a clear slowdown in most markets in December.” It’s mainly in recruitment for permanent positions. But even temporary work placements fell over the course of the year, and the firm said it didn’t see a rise in seasonal work.

It means the company should post pre-exceptional operating profit of around £60m for the first half of the year. And that’s below analysts’ expectations.

What does it mean?

Forecasts had suggested a modest dip in earnings this year, followed by a couple of years of growth. Perhaps more important, we were looking at dividend rises in the next few years too.

That seems a lot less likely now. And with a forecast yield for the current year of just 2.8%, it’s not exactly an income investor’s dream.

The Hays update also spoke of continued uncertainty, saying it’s “too early to say if December’s weakness reflects a sustained market slowdown or some placement deferrals.“

Cost savings

Going into 2024, Hays has stepped up its efforts to cut costs. The company now says it could end up with an annualised £30m in savings.

We should see restructuring charges of around £12m in the current half though. So that should hit the interim figures.

They should be with us on 22 February. And until then, putting a valuation on Hays shares could be a bit tricky.

I want to see how broker forecasts change now. But that’s only a short-term thing, and I’m more interested in the long-term outlook.

What should we do?

The thing is, the recruitment business is volatile. It’s often seen as a barometer of the economy in general. But it’s a bit more than that.

When things are rosy, recruitment firms can often do even better and their shares can beat the market.

And when the economic clouds loom, well, you get the picture. But which is the better time to buy?

For me, it has to be when the near future looks uncertain, and companies are cutting their hiring.

Buy while down?

The first sign of bad news is rarely the last sign though. And those H1 results could be tougher than we hope.

So I fear more volatility in the Hays share price, and it might well have further to fall.

Still, the balance sheet is strong, with £60m in net cash.

And for investors who like the business and are bullish on the long-term future, I think the next few months could present a buying opportunity.

The post The Hays share price is one of the FTSE 250’s biggest fallers! Here’s why appeared first on The Motley Fool UK.

Analysts in the UK don’t always publish earnings previews for quarterly or half-year periods. Therefore, the upcoming figures can only serve as an indication as to whether the companies’ full-year forecasts can be met.

Entain (Q3 trading update)

Entain (LSE: ENT) is an international sports betting and gambling company. It owns brands such as Bwin, Coral, Ladbrokes, PartyPoker, and Sportingbet. Entain will provide a trading update for its most recent Q3 performance ending September 2022 on 13 October.

The FTSE 100 betting firm expects to report growth in revenue after a busy summer. However, City analysts are cautious about the outlook the company will provide after it cut its growth outlook in its last earnings report. With inflation continuing to run rampant, the cost-of-living crisis is expected to dampen the number of bets being placed.

While investors won’t be too excited about Entain’s flat online revenue growth this year, there will be plenty of attention on its US joint venture (JV) with MGM, and whether that is making good progress towards profitability.

Entain doesn’t disclose revenue or earnings figures for its quarterly updates, so a direct comparison can’t be drawn this October. Rather, the company discloses metrics such as net gaming revenue and updates on its JV, which are useful indicators too. These can serve as an earnings preview for investors to determine whether the firm is on track to hit analysts’ estimates by the end of the year.

Hays (Q1 trading update)

Hays (LSE: HAS) is a multinational company that provides recruitment and human resources services to companies across 33 countries globally. The FTSE 250 firm is expected to release a brief trading update for its most recent Q1 performance ending September 2022 on 13 October.

Updates are also expected from Hays’s peers Robert Walters and PageGroup, which will provide a clearer picture of whether the industry’s robust performance have continued into the later part of this year. Investors will be keeping a close eye on headcount as well as skills shortages, and how the current macroeconomic environment has and may impact earnings moving forward.

Only slightly over a month ago, Hays disclosed impressive bottom line growth of 128%, while declaring a £121m special dividend. In doing so, it also affirmed to investors that it was well equipped to face the macroeconomic headwinds. Whether this will carry into Q1 and the rest of its financial year remains to be seen.

Like Entain, Hays doesn’t disclose specific revenue or earnings figures for its quarterly updates. Therefore, investors will have to make direct comparisons using growth rates disclosed in the update. These can serve as an earnings preview for investors to determine whether the recruiter is able to continue its strong showing.

YouGov (FY22 Earnings)

YouGov (LSE: YOU) is a British internet-based market research and data analytics firm. It also operates in Europe, North America, the Middle East, and Asia-Pacific. The company will be reporting its FY22 results ending July 2022 on 11 October.

After a pretty strong year in FY21, investors will be keen to see what the analytical company reports on Tuesday. Given its growth attributes, analysts have high expectations for both YouGov’s top and bottom lines, as well as the outlook for its new financial year. With the stock down 45% this year, investors will be hoping for a good report.

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The volatility, and correction, have been engendered by the new government’s exuberant fiscal policy. A little over a week ago, the chancellor promised to lower taxes and incentivise economic activity.

However, while tax cuts may sound great, the concern is that our fiscal policy and monetary policy are working at odds. While the Bank of England (BoE) is attempting to bring inflation down through rate rises, central government is committing to policies that are highly likely to cause more inflationary pressure.

So, here are two discounted stocks I’m looking to buy for my portfolio.

Barclays

Barclays (LSE:BARC) is among the biggest banks in the world and the top three in the UK. However, it hasn’t performed quite as well as its peers this year, and that’s primarily due to a massive impairment on securities sold in error.

In July, Barclays reported a fall in pre-tax profits due to a £1.9bn charge to cover the cost of buying back securities it sold in error and a £300m impairment provision for bad debts. Pre-tax profits fell 24% to £3.7bn. As a result, the stock is down 22% over the year.

However, Barclays shares are also down 13% over the past week. The stock, like other banks and financial institutions, sank following the mini-budget. Things got worse amid reports that the government was planning to introduce quantitative easing to avoid paying £10bn a year in repayments to banks.

However, there is one big plus. And that’s the impact of higher interest rates on margins. Banks have already seen margins increase, but with BoE rates set to near 6% next year, net interest margins (NIMs) will soar. Recessions aren’t good for credit quality, but higher NIMs will more than make up for it.

Hays

Recruitment firm Hays (LSE:HAS) is down 13% over the past week, and is now down 41% over the course of the past year. However, the business has performed well over the past 12 months.

In August, Hays reported a jump in full-year profit thanks to an “excellent” fee performance across all regions amid a recovery from the pandemic. In the year to 30 June, operating profit rose to £210.1m from £95.1m a year earlier.

However, I, like many other investors, am trying to anticipate how companies will be performing in 6-12 months time. And the problem is, there are concerns that the UK labour market might be cooling.

As a result, Hays is currently trading at a discount. In fact, it is near its lowest point in 10 years. But personally, I think that’s overdoing it.

Yes, we have recession forecasts in UK, and elsewhere in Europe where Hays operates, but we’re not looking at deep Covid-like recessions. After all, in the UK, we’re actually seeing a lot of emphasis on enhancing economic activity.

The post 2 shares to buy at massive discounts after UK market tanks! appeared first on The Motley Fool UK.

Recruitment

Shares in recruitment specialist Hayes (LSE: HAS) have faded over the past 12 months. I’m not surprised, with such a gloomy economic outlook.

But results released Thursday were anything but disappointing. For the year to 30 June, net fees rose by 30%. And operating profit soared by 121%.

The company more than doubled its ordinary dividend, to 2.85p per share. That’s only a 2.4% yield. But thanks to strong cash generation, it added a special dividend of 7.34p and lifted its share buyback programme to £75m.

Chief executive Alistair Cox spoke of “long-term structural opportunities, acute skill shortages and strong markets.” It seems there’s some significant upside when we’re in times of economic turmoil. And Hayes might be just the kind of investment to profit from a recovery.

We’re looking at a modest trailing price-to-earnings (P/E) ratio of around 13.

Biopharma

PureTech Health (LSE: PRTC) recorded a loss in 2021. And, at the halfway stage in 2022, it’s still very much a biotechnology company working towards sustainable future profits.

The share price has been picking up in the past couple of months, and barely moved on results day.

The year so far has all been about clinical development. In the words of chief executive Daphne Zohar, “the first half of 2022 has been an exceedingly strong period for PureTech.”

Phase 3 trials of schizophrenia treatment KarXT appears to have gone very well, without the serious side effects that apparently come with existing treatments. Zohar adds: “It is now poised to potentially be the first new class of medicine in over 50 years for patients living with schizophrenia.“

The balance between long-term potential and current liquidity is key. Though PureTech recorded a loss again, it had $341m cash and equivalents at 30 June. That looks good enough to me.

Building

CRH (LSE: CRH) is my final pick of companies reporting Thursday. And its share price gained a few percent in response to interim results.

Chief executive Albert Manifold said: “CRH has delivered another strong performance with further growth in sales, EBITDA and margin despite a challenging and volatile cost environment.“

The firm reported a 14% rise in sales and a 21% jump in EBITDA. What’s more, the EBITDA margin improved, and bottom-line earnings per share increased by 36%

The company lifted its interim dividend by 4%, and it’s now set for a new tranche in its share buyback programme.

The one thing that concerns me is net debt of $4.3bn. That is down by $1.7bn, though, and looks easily manageable.

Thoughts

This is my first look at a single day’s reporting from these companies. I see attractions in all of them, but they all have their own individual risks too.

I’d never buy a stock based on just one update. But I’ve seen enough here to want to investigate all three further.

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This morning, I saw a forecast from Citi analysts that suggested inflation would hit 18% in the UK. That’s pretty shocking and some way above the Bank of England’s projections. This will likely have a profound impact on disposal income in the UK and will only exacerbate the cost-of-living crisis.

But one sector that could benefit from inflation is recruitment. Let’s take a closer look at why and my top stock in this sector.

Impact of inflation on recruitment

There are a number of ways to assess the impact of inflation of employment and recruitment. Firstly, inflation pushes up the cost of goods and puts pressure on both the employed and unemployed to enhance their income.

Employed people may seek a wage increase or even strike like we’re seeing at Felixstowe docks. Others may look for a new job.

But the unemployed are likely to feel the pain too, probably even more so. Not everyone can generate passive income and some may be living off unemployment benefits or, if they’re older, their pension.

In act, the Daily Mail, recently reported that a record number of pensioners had joined the workforce in the three months to June 30. If people are feeling the pinch now, just imagine how it will feel come autumn.

And finally, as economically inactive people may also be tempted back into work by wage inflation. With salaries being pushed upwards, working may look more attractive than it had done so before.

Can Hays benefit?

Hays (LSE:HAS) is one of the UK’s largest recruitment groups. In July, the business highlighted a record end to the year. In the three months to 30 June, the white collar specialist said fees had risen 23% during the fourth quarter on a like-for-like basis, or by 24% in total.

Group operating profit is now expected to come in around £210m, at the top end of guidance. In fact, if it wasn’t for the impact of exiting the Russian market, the company’s earnings would be coming in way above initial guidance.

So can Hays prosper as inflation rises further? I definitely think there is a good chance it could for all the reasons mentioned above. I don’t think the case for getting into work, getting a better paying job, or a raise, has ever been stronger.

One issue is the economy’s eventual slowdown. The UK is predicted to go into recession and shedding jobs is a characteristic of that. Ironically, a tight labour market is driving up inflation which will likely push us into recession (I actually wrote about this in an editorial last year).

But the recession isn’t forecast to be particularly deep, so I’m not expecting unemployment figures to rise considerably. Instead, I believe Hays should benefit from the current situation.

It also earns money overseas, which could provide additional benefit as the pound gets weaker.

I already own Hays shares, but I would buy more at the current price. I really do see Hays prospering as more people get back into the jobs market.

The post Could this discounted UK stock soar with inflation tipped to hit 18%? appeared first on The Motley Fool UK.

The three companies I’m looking at today are recruiter Hays (LSE:HAS), high-end fashion brand Burberry (LSE:BRBY) and investment platform Hargreaves Lansdown (LSE:HL).

Hays

The recruitment firm has fallen from a year high of 181p to 117p at the time of writing. This comes despite a very strong UK labour market, which is a core operating location for Hays. Job vacancies in the British economy recently hit a record high with 1,318,000 positions advertised. 

However, recruitment firms are very sensitive to fluctuations in the economy. It appears that inflationary pressure and unfavourable economic forecasts have weighed on this stock’s share price.

Hays raised its profit guidance following a solid first half in February. Pre-tax profits in the six months to the end of December surged 363% to £97.7m. Full-year profits are expected to be between £210m and £215m, in line with pre-pandemic performance.

I’m also confident that pent-up demand for its services will drive future growth. Millions had delayed job moves during the pandemic.

Burberry

Despite inflationary pressure and the increasing negative economic outlook, I think demand for Burberry’s products are fairly immune to price rise issues. Consumers, particularly wealthy individuals, are often willing to pay whatever’s asked to get what they want. 

Burberry’s share price has also been impacted by its decision to close shops in Russia after the invasion of Ukraine. China’s economic turmoil has also weighed on the share price. As I write, it is trading at £16.08 a share, down from a year high of £22.67.

Burberry posted solid financials in 2021, with pre-tax profit in excess of pre-pandemic results. It reflected an increase in consumer and business activity following the lockdowns of the previous year. One concern is geopolitical risk. China is one of Burberry’s largest markets and Chinese customers have been known to turn against brands.

I currently don’t hold Burberry stock, but I’m looking to add it to my portfolio.

Hargreaves Lansdown

Hargreaves Lansdown’s investment platform is the market leader in the UK. Despite this, the Bristol-based firm reported a 20% drop in pre-tax profit for the six months ended December, sending its stock sliding. The company had benefited from a trading boom during earlier lockdowns. But profits fell in a calmer 2021.

Hargreaves is currently trading at 1,028p a share, down from a year high of 1,778p. Despite the fall in profits, the company remains profitable and saw sizeable increases in revenue in each of the five years to 2021.

The drop in profit overshadowed the company’s plans for digital transformation. The company intends to spend an extra £175m over the next five years in order to improve its offering to clients. It may be a while before we see the results.

I’ve already bought Hargreaves, but if I were to buy more today, I can expect a respectable 3.7% yield.

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