Monitoring the performance of FTSE 100 shares is a key part of my investing routine. Although there have been plenty of winners in 2023 so far, it’s also useful to identify the companies underperforming the index.
After all, buying stocks at cheap prices can be profitable in the long term, provided they eventually recover. In that context, I’ve been taking a close look at educational resource and testing provider Pearson (LSE:PSON) and specialty insurer Beazley (LSE:BEZ). These Footsie stocks are down 13% and 14% this year.
So, should investors consider adding them to their portfolios? Here’s my take.
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Pearson
At first glance, it seems odd that the Pearson share price is struggling this year. A new £300m share buyback programme announced at the end of the first quarter indicates insiders see value at these beaten-down price levels.
Q1 sales for English language learning courses proved particularly strong, climbing 66%. This helped to offset a 14% decline in virtual learning turnover.
The company’s on track to deliver a 28% rise in adjusted profit this year to £585m. That would build on the 18% profit improvement in 2022.
So, why has the share price fallen?
The culprit is ChatGPT. Pearson’s competitor, US online learning provider Chegg, recently announced that the AI chatbot was hurting its business. This admission sparked jitters among traders, causing Pearson shares to fall 15% in a single day.
Indeed, the AI revolution will pose disruptive challenges to many industries. Education providers like Pearson could be in the firing line if younger, tech-savvy students forgo textbooks and traditional educational resources as a result.
However, there’s a strong case to be made that investors have overreacted. Tools like ChatGPT have limitations and Pearson is more diversified than Chegg, considering 80% of its profits come from businesses beyond higher education.
Beazley
Lloyd’s of London underwriter Beazley faces challenges from rising interest rates. Fixed-income investment losses nearly halved its 2022 profits to £134.6m.
With the recent inflation shock and corresponding 50 basis points rate hike by the Bank of England, it seems likely that monetary policy risks will intensify in the coming months.
However, investors can take comfort in a strong first quarter. Gross written premiums increased by 12% to $1.37bn, due to particularly strong demand for the company’s property risks and cyber risks divisions.
In addition, the investment return on Beazley’s portfolio has improved. In 2023, the company has delivered a 1.2% gain of $104m, compared to a 1.2% loss in Q1, 2022.
What’s more, investors benefit from a 2.3% dividend yield. The passive income payouts look safe, with very robust forward cover at 6.2 times earnings.
Stocks to buy?
Investors considering buying these FTSE 100 shares could be looking at bargain prices today. Granted, both face challenges, but there are reasons to be optimistic about their ability to manage these risks too.
For Pearson, there’s a considerable amount of hype surrounding AI at the moment. This could mean the threat chatbots pose is overplayed, but much will depend on how the technology develops.
For Beazley, interest rate risk is undoubtedly a major headwind. Nonetheless, this is a firm with disciplined underwriting practices exhibiting strong premium growth.
If I had spare cash, I’d buy both stocks today.
