The FTSE 100 ended last week up by 1.3% at 7,188 points. After a long, sunny Bank Holiday weekend, investors seem to have shaken off Brexit fears and decided UK stocks are still worth buying — a view I share.
However, this rising tide didn’t lift all ships. A number of stocks drifted lower, while one firm shocked the market with a 29% fall. Let’s take a look at the news behind last week’s biggest FTSE 100 losers.
Micro Focus International (-29%)
The Micro Focus International (LSE: MCRO) share price fell by 29% last week, after the FTSE 100 software group warned of a bigger-than-expected fall in sales. Revenue is now expected to fall between 6% and 8% this year, compared to a previous guidance for a 4% to 6% decline.
The company said that “a deteriorating macro environment” is causing customers to take longer to make purchasing decisions. Problems relating to the 2017 acquisition of the HPE software business also continue to cause “weak sales execution.”
The news shocked the markets because, at the start of July, the firm issued a much more upbeat statement and said trading was in line with expectations. My reading of this is that Micro Focus has lost or failed to win a major contract over the summer, upsetting its plans for the year.
In other circumstances, I’d suggest this might be a buying opportunity. In this case, I think the firm’s $3.8bn net debt means the risks are too high. The board is starting a strategic review. My view on the stock is also under review. Until we know more, I’m staying on the sidelines.
Aveva Group (-4%)
My second firm is also a software group. The Aveva Group (LSE: AVV) share price slipped 4% lower, despite issuing no news. One possible explanation is investors trimmed their position in the stock after seeing Micro Focus’s warning of weaker market conditions.
Although Aveva’s customer base is more tilted towards heavy industry than Micro Focus, there’s some overlap between the two firms’ target markets.
Another possibility is that investors are starting to feel Aveva stock may be getting expensive. That’s a view I’d share. The AVV share price has risen by more than 35% over the last year. The stock now trades on 35 times 2019/20 forecast earnings, with a dividend yield of just 1.2%. Although I rate Aveva highly as a business, it looks too expensive for me at current levels.
British American Tobacco (-3%)
British American Tobacco (LSE: BATS) — which owns brands such as Dunhill, Lucky Strike and Camel — faces a number of challenges at the moment. The group has not yet made much progress at reducing the £46bn debt pile that resulted from the 2017 acquisition of Reynolds American.
Investors are also concerned about the wider outlook for tobacco stocks. Regulators are taking a closer interest in new products such as vapes and ‘heat not burn’ type cigarettes. Meanwhile, smoking rates continue to fall in developed markets.
For contrarian investors who believe BAT can adapt and survive, the current situation could be a buying opportunity. The group’s profit margins remain high and cash generation is strong. The stock is priced modestly, on less than nine times forecast earnings and with a 7.3% dividend yield.
This won’t be an investment that appeals to everyone. But I think there’s probably some opportunity here.
