The FTSE 100 is full of solid blue-chip stocks that investors don’t expect to crash 25% in a month but all too often they do. The following two have just taken a severe beating. I love buying bargain stocks, so should I snap them up?
The biggest faller is pest control specialist Rentokil Initial (LSE: RTO), which fell a thumping 29.53% over the last month. That put the wind up me, because I’d been thinking of buying it to benefit from Parisian bedbug mania. Over one year, it’s down 22.34%.
A tough quarter
Back in July Rentokil looked set to clean up, as its interim profits showed revenues soaring 70% to £2.7bn. It was enjoying growth in every region, while demonstrating its pricing power and growing through M&A, and making early progress on integrating its Terminix acquisition.
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North America is now its largest market, which offers a real opportunity, but also brings risk as we saw in its Q3 results, published on 19 October.
Management warned full-year North America performance was set to be “marginally below” previous expectations, as economic uncertainty hit new customer acquisition and revenues rose just 2.2%. Overall revenue growth was much better, up 53.3% to £1.38bn, as Europe and emerging markets compensated. Yet this was still way below H1’s 70% revenue growth. Investors were in an unforgiving mood, amid wider stock market volatility.
A little too unforgiving, in my view. I think this could be a good opportunity for a long-term buy and hold investor like me. However, Rentokil isn’t cheap, trading at 19.81 times earnings, while the 1.78% yield is at the lower end of the scale. With the US economy braced for further interest rate hikes, the Rentokil recovery could take time. Yet I hope to buy it when I have the cash.
Troubled banking sector
NatWest Group (LSE: NWG) is the FTSE 100’s second-worst performer of the last month, down 24% and 20.79% over the year. Banking stocks have had a bad time generally of late, but NatWest took a real beating from the Nigel Farage ‘debanking’ scandal, which cost CEO Alison Rose her job.
On 27 October it suffered another blow as Q3 profits missed expectations and management was forced to cut its full-year net interest margin outlook.
Banks were supposed to benefit from rising interest rates, which should allow them to widen the gap between what they pay savers and charge borrowers. Instead, they’ve been squeezed by competitive savings and mortgage markets. Windfall tax threats haven’t helped. Plus there is the danger of rising bad debts, if house prices crash.
FTSE 100 banks are trading at rock-bottom prices, despite reporting billions in profits every quarter. NatWest trades at just 4.88 times earnings. It’s forecast to yield a whopping 9.65% this year, and 9.66% in 2024.
To me it looks like a fantastic buying opportunity. The problem is that the banks have looked great value for several years, only to lurch from one disappointment to another. I already hold a big position in Lloyds Banking Group. NatWest probably has greater bounce-back potential but I have enough exposure to this troubled sector.
