Why I’d sell Centrica plc and this value stock

One Fool fears political intervention could dent the future returns of these value stocks.

| 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.

For a supposedly defensive company, Centrica (LSE: CNA) has taken a beating recently. On top of a 50% fall in the share price over the last five years, investors also suffered a dividend cut in 2014 and have yet to see an increase. 

The unloved shares now trade on a lowly forward P/E of 10.5 and offer a 7% yield. Could now be the time to buy? 

I’d say not, given the pressure on the core business. According to CEO Ian Conn, there are now 25 energy suppliers in the UK and 15 switching websites. It is easier than ever for customers to hunt for better deals and there are more companies competing on price than ever before. 

As a result, total customer account holdings in the UK fell 2% in the first-half of this year. That’s not a huge decline by any stretch, but I’m averse to investing in a declining business just for yield and I don’t see competition calming down any time soon. 

Further to this, the company has switched strategies a number of times in recent years. Its most recent flip-flop is the swing from heavily investing in, to downsizing, its oil exploration and production business after the oil price crash a few years ago. 

The resulting asset sale has admittedly strengthened the balance sheet, knocking 22% off of net debt, which now stands at a still sizeable £2.9bn, but surely long-term shareholders will be frustrated with the mismanaged venture. 

The threat of political intervention still hangs over the shares too. Theresa May reiterated her intention to cap energy prices at the Conservative party conference earlier this month and that has the potential to be bad news for Centrica. 

I prioritise a stable strategy and steer clear of potential political intervention when selecting dividend payers, so I wont be adding Centrica to my portfolio in the near future.

Volatile value stock

CareTech Holdings (LSE: CTH) is another value stock I’ll be steering clear of. It provides specialist social care including people with various learning disabilities, eating disorders and behavioural issues. A noble cause to be sure, but one that might not generate excellent shareholder returns in the long run.

The company negotiates its fees with local authorities on a yearly basis. The inability to set their own prices increases the chance that costs might outgrow revenues and I fear the highly politicised nature of healthcare services could lead to their exceptional profit margins being crimped deliberately in the future. 

Perhaps I’m too bearish on the stock. The specialist nature of the care provided helped the company achieve a near-20% operating margin in the first half of this year and perhaps means there are fewer competitors. The company also reported a good set of results today, including 93% occupancy levels in the mature estate and a net increase of 215 places available.

Perhaps the forward P/E of 12 shows the market is uncomfortable with the company’s significant net debt levels, which fell slightly to £147.2m over the period. 

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.

Zach Coffell has no positions in any 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.

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »