September wasn’t a bad month for the UK stock market as a whole. However, there were some big losers over the period including Ocado (LSE:OCDO), Smith & Nephew (LSE: SN.), and Diageo (LSE:DGE) shares.
So, what was behind the weakness in these shares? And are they worth buying today?
Ocado
Ocado experienced the biggest fall of the three aforementioned stocks, losing about 31% of its value.
I put the weakness here down to a few factors.
Firstly, the stock saw a big downgrade from analysts at Exane BNP. Stating that Ocado’s risk/reward was “out of kilter again”, it lowered the company’s rating to ‘underperform’ from ‘neutral’ but kept its target price at 390p.
Secondly, in the second half of the month, sentiment towards unprofitable companies rapidly deteriorated as investors realised that interest rates are going to be higher for longer.
Next, the stock had seen a huge run (+190%) between early June and late July. So a pullback was always likely.
Are Ocado shares worth buying today? I think so, as I believe the company has considerable long-term growth potential.
That said, I see them as higher risk, so I wouldn’t take a huge position.
Smith & Nephew
Turning to medical devices company Smith & Nephew, its shares fell around 4% for the month.
Again, there were a few issues that caused weakness here.
One was hype around weight-loss drugs such as Novo Nordisk’s Wegovy and Eli Lilly’s Mounjaro. The theory is that these drugs could potentially lead to less demand for joint replacements in the future.
Another was continued economic weakness in China, where Smith & Nephew generates a decent chunk of revenue.
Is this a good buying opportunity? I think so.
Personally, I can’t see weight-loss drugs having a huge impact on the firm’s market in the long run (although we can’t rule it out).
And right now, the healthcare stock looks really cheap. At present the forward-looking price-to-earnings (P/E) ratio here is less than 12. I think that’s a steal.
Diageo
Finally, we have Diageo, which fell around 6%.
I think a lot of the weakness here is down to China. Late in August, rival Pernod Ricard warned that its Chinese sales will decline in the current quarter as China’s property meltdown was keeping people away from bars and nightclubs.
But it’s potentially also related to the ‘higher-for-longer’ interest rate theme. If interest rates remain higher, consumers are going to have less money to spend, and may end up downgrading to cheaper spirits brands (Diageo generally focuses on more premium brands).
Is now a good time to buy the stock? I think it is.
Looking ahead, I expect this company to continue growing its revenues, earnings, and dividends at a healthy rate as it expands into new markets (and wealth rises in the developing world).
And with the stock trading on a forward-looking P/E ratio of just 18, I like the risk/reward proposition.
