Why I think it’s time to be greedy with the SSE share price

Things could soon improve for utility giant SSE plc (LON:SSE), says Roland Head.

| 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.

Investment analysts often use a technique known as mosaic theory to predict how a company’s performance might change in the future. By combining many small pieces of information, they form a view on what might happen next.

How’s this relevant to us? Well, big utility stocks have been seriously out of favour over the last few years. The SSE (LSE: SSE) share price has fallen by 27% over the last two years ,and the group has been forced to schedule a dividend cut for 2019/20 — something it’s never done before.

Bearish investors have put forward a whole list of reasons why things may continue to get worse. I’m not so sure. Mosaic theory suggests to me that the outlook may soon start to improve.

The market is changing

Customer numbers fell by 6% at SSE last year, as many opted for cheaper fixed-rate deals from smaller energy suppliers. Unfortunately, some of these cheap deals are turning out to be unsustainable.

Eight small energy suppliers went bust last year. On Wednesday, a ninth, Economy Energy, failed, leaving a further 235,000 customers in need of a new energy supplier.

Although the government’s new price cap is expected to have a moderate impact on big suppliers like SSE, it’s also said to be hurting small suppliers, who lack the financial muscle of the big players.

Overall, it’s starting to look like many cheap deals from small suppliers were too good to last. I think larger firms will enjoy a more level playing field over the next few years.

The bad news is in the price

Billionaire investor Warren Buffett has often noted that investors should be greedy when others are fearful. I think this could be one of those times. SSE has had a lot of bad press over the last year, but this information is already known and reflected in the share price.

Looking ahead, I think there’s a good chance the group’s performance will gradually recover. As the UK’s largest renewable supplier, SSE could be well positioned for the future.

With the group’s shares trading on 11 times 2019/20 earnings, and offering a dividend yield of 7.3% (after the dividend cut), I think SSE looks like a good buy for a long-term income.

This could be one to avoid

One the other hand, problems at cycle and motoring retailer Halfords Group (LSE: HFD) still seem to be getting worse.

The Halfords share price was down by 20% at the time of writing on Thursday, after the company issued a profit warning. Underlying pre-tax profit is now expected to fall by about 15%, to between £58m and £62m. Previous guidance was for this figure to be unchanged from last year, at about £72m.

The company blames November’s warm weather for a fall in sales of weather-related motoring products. But sales of more expensive adult cycles also fell slightly over the Christmas period. You can’t blame mild weather for that.

My verdict

Halfords isn’t without attractions. Debt is low and the firm’s cash generation has historically been very good. The shares yield 8% after today’s fall, and management made a fresh commitment to maintain the dividend in September. A cut seems unlikely, unless things get much worse.

However, today’s news is a disappointment. I’d be tempted to wait until the picture improves before considering whether to invest.

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.

Roland Head 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.

More on Investing Articles

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »