Investors hoping to pick up some bargains following the fall in the market this week should take a close look at this week’s share-tip roundup from Trustnet Direct – it contains seven “sell” recommendations, including an explanation of why it may be a good idea to steer clear of UK banks.
Tuesday
G4S – Sell
Sell G4S, was the message from Questor on Tuesday. Shares fell to a six-year low on Monday as brokers raised concerns over the company’s fortunes in emerging markets and the health of its balance sheet. Its expansion strategy has been fuelled by debt and although there is nothing wrong with this per se, it seems that it has struggled to maintain quality as the growth has taken place. Balance sheet restructuring is needed, but selling off operations will stifle cash-flow, so another cash call could be made on investors. With shares trading on 14 times earnings and offering a 4.4 per cent dividend yield, the risks aren’t priced in.
Performance of stock over 6yrs
Source: FE Analytics
Rolls Royce – Sell
Tempus said investors should avoid Rolls Royce for now. The company cut its dividend today in an attempt to navigate what is in the grand scheme of things a relatively short term blip in the market – this is still a world-leading company that many experts believe could return to 2015 levels of profitability by 2020. The marine division is struggling off the back of the low oil price, while there has been a shift in the profile of the aero engine business, too, as airlines move their focus. This week’s figures didn’t contain another profit warning, but a few years of volatility are still to come.
Wednesday
Sophos – Sell
Questor said investors should avoid Sophos. The column pointed out that ever since the company achieved its hefty flotation last year, it has struggled to justify its punchy valuation and Tuesday’s disappointing results did little to alleviate these concerns. Despite growing awareness of cyber security, sales are slowing and although this can to some extent be pinned on the strength of the pound, it’s the exit of private equity investors that seems to be the greatest cause for concern. Shares now trade below the IPO price – and don’t look like a bargain.
TUI – Sell
There was yet another sell recommendation from Tempus, this time for TUI. It’s a tough time for tour operators to the Mediterranean, with bookings under pressure from the humanitarian crisis in Turkey and terrorist concerns across north Africa. On top of this, the German market is overcrowded, hitting margins, so despite a decent performance in some corners – UK long haul bookings, for example – Tuesday’s results from TUI weren’t great. Despite the headwinds, the guidance given remained upbeat, but the column remains wary of the sector as a whole and even with the shares trading at a 12 times multiple, now isn’t the time to jump in.
Thursday
ARM Holdings – Buy
The single buy recommendation of the week came from Tempus and was awarded to ARM Holdings. Wednesday’s results caused a degree of concern in the market, pushing the company’s stock lower, but the numbers appeared to allay fears that tougher times may lie ahead for the semiconductor industry. There was some criticism over the vague nature of guidance on offer, but it has a more diverse customer set than competitor Imagination Technologies – yes, there’s still a big link to Apple, but the column played this down. A healthy cash pile means R&D spend can continue apace and ARM has the ability to remain ahead of the pack, justifying the 27 times multiple the stock now trades on.
UK banks – Sell
Questor recommended avoiding the UK banking sector. There’s the idea that after declines in the first six weeks of the year, banks could offer some rich pickings for investors, but the sell-off appears justified given the growing fears that borrowers will be unable to pay off loans. So far, defaults are limited, but the situation could yet unravel and the column said UK banks are ill-prepared for the next downturn.
Friday
Enterprise Inns – Sell
Tempus said investors should avoid Enterprise Inns. The company has set out a clear roadmap for the next few years, selling 20 per cent of its pubs, raising cash for reinvestment and refinancing debt in 2018. This is, however, an operation of scale and finding all the required components in sufficient size is not going to be easy. That said, the group had a good Christmas and its upmarket Craft Union brand is evidently performing well, too. At the current price, the column said that although it might look like a buying opportunity, better financed pub operators may outperform.
