I like buying UK stocks after they’ve had a stinker, because it gives me an opportunity to pick them up at a cut-price valuation.
April was a strong month for the FTSE 100 but the index had its share of strugglers, too. This may have thrown up a double buying opportunity.
Is it a struggling online grocer? Is it a disruptive tech hero? However investors view it, Ocado Group (LSE: OCDO) has been a lousy investment.
Out of favour shares
The Ocado share price has crashed 75% over five years and 30% over 12 months. It even ended April 21.91% lower. Its market cap has now dwindled from £22bn to less than £3bn since its pandemic highs. Frankly it’s horrible.
Ocado was once a FTSE 100 growth darling, but like many companies offering super-sized profits tomorrow, it was hit by higher interest rates and inflation today. This drives up borrowing costs, creates risk aversion and erodes the value of its future profits – should Ocado ever make any.
There was a brief flurry of excitement last week, when it emerged shareholders were pushing for Ocado to list in the US. These days, fleeing to New York is seen as a cure for every ill, given higher valuations stateside. The excitement didn’t last.
Unfortunately, I’m looking for a stock that’s had a bad month, but whose prospects remain bright. I really don’t know what’s going to happen to Ocado. It doesn’t help that it’s embroiled in a legal dispute with Marks & Spencer Group.
The shares could rocket 20% in May, or crash another 20%. Either way, buying it is an act of faith. I just don’t think I’m brave enough.
Bargain hunt
I’m not a complete coward, though. I did buy sports fashion retailer JD Sports Fashion (LSE: JD) after January’s profit warning. Its shares briefly rallied but fell 13.31% in April, the second worst showing after Ocado. It’s down 27.6% over 12 months.
I’ve already placed my bet on that one so I’m turning my attention to April’s third-worst performer, pest control specialist Rentokil Initial (LSE: RTO). It ended the month down 12.19%. Over 12 months, it’s crashed a whopping 34.5%.
I’ve had a close call here, because I was planning to buy Rentokil at the start of the year. I thought the market had reacted overreacted to a dip in US sales, but maybe I missed something. Either that or the market continues to overreact.
On 18 April, Rentokil reported a 0.9% increase in reported Q1 revenue to £1.27bn, or 4.9% at constant exchange rates. North American performance stabilised, with organic revenue up 1.5%.
Growth in Latin America, the UK, Asia, Middle East and North Africa was in the low single digits. CEO Andy Ransom said the group had “made a positive overall start to 2024” but markets clearly didn’t agree and down the stock went.
I think there might just be a contrarian buying opportunity here. The Rentokil share price is not quite as cheap as I’d like, though, trading at 17.86 times earnings. The yield is low at 2.33%. Also, markets could take time to reverse their dim view of the stock. But I’m still tempted to buy it.
