Are you brave enough to rescue these beaten-down bargains?

Bilaal Mohamed considers whether or not it’s the right time to buy these heavily discounted shares.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The UK’s leading outsourcing specialist Capita Group (LSE: CPI) has been the biggest faller in the blue-chip FTSE 100 index so far this year, having shed around 60% of its value over the last 12 months. So, could this be a once-in-a-lifetime opportunity to grab a sensational bargain, or should investors remain cautious and resist the lure of the heavily-discounted share price?

10-year lows

Oh, what a difference a year makes. In the summer of 2015 the London-based outsourcing giant was enjoying its time in the sun after seeing its shares climb to record highs of 1,326p on the back of another successful year of steady growth. In fact, since 2001 Capita hasn’t failed to report growth in both its sales or underlying earnings even once. But it looks like 2016 could be the year it bucks that longstanding trend after the firm yesterday issued its second profit warning in just three months.

Capita said that it now expects underlying pre-tax profits for 2016 to be “at least £515m”, somewhat lower than the £535m to £555m guidance it gave in September, which in itself was well below previous estimates of £614m. The market duly responded, sending the shares 14% lower and changing hands at their lowest level in 10 years.

Slowdown

Capita has had a tough year with a slowdown in its IT Enterprise Services division, costs incurred from its Transport for London contract, and delays in client decision-making all contributing to the downgrade in full-year profits guidance. In response, the board has decided to sell the majority of the Capita Asset Services division and a small number of other non-core businesses, as well as reducing costs, in a bid to become leaner, reduce debt and strengthen its balance sheet.

With Capita’s shares now trading on an ultra-low P/E rating of just seven for the current year, I can certainly see why contrarians would want to consider Capita as a long-term recovery play. But I expect analysts’ earnings estimates to be revised downwards over the coming weeks, and the shares might not be such a bargain after brokers have finished wielding the axe on their profit forecasts. Capita may well turn things around, but I think it’s far too early to be making any buying decisions so soon after the announcement.

Worse for wear

Another firm looking worse for wear this year is specialist building products distributor SIG (LSE: SHI). The FTSE 250 firm lost over a fifth of its value and plunged to near five-year lows last month as it too issued a profit warning for 2016. The group cited delays to some projects in the commercial sector and subdued demand for technical insulation in the petrochemical and manufacturing sectors as the main reasons for the lowered profits guidance.

As a result, the City is now expecting the Sheffield-based firm’s profits to shrink by 12% to £58.27m this year, with a further drop to £56.36m expected in 2017. With no growth in sight, I’d be inclined to give this one a wide berth too.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »