FTSE 100-member SSE’s share price is in freefall! This is what I think you should do

As its share price drops, SSE plc (LON: SSE) could offer improving prospects versus the FTSE 100.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Declining FTSE 100 shares are nothing new. After all, the index has fallen by 12% since reaching an all-time high in May 2018. However, the drop in the SSE (LSE: SSE) share price of 21% during the same period is perhaps surprising to some investors. The company has been a popular income share in recent years, with it apparently offering a defensive profile.

The business is experiencing a period of heightened risk, however. As such, its shares have delivered poor performance relative to the wider FTSE 100. Yet there could be turnaround potential ahead. That’s especially the case while a number of stocks, such as a FTSE 250 company which released a disappointing update on Friday, continue to be overpriced in my opinion.

High valuation

The company in question is cloud-enabled end-user and network security specialist Sophos (LSE: SOPH). Its performance in the first nine months of the year has continued to be subdued, with billings growing by just 2% in the period. A further sequential improvement in the renewal rate to existing customers in the third quarter was offset by a modest decline in new billings from new customers, as well as a decline in hardware billings.

Investors reacted negatively to the update. The company’s share price declined by over 20% following its release. This means that in the last year, its share price has dropped by around 55%.

Looking ahead, Sophos is forecast to post a rise in earnings of 17% in the current year, followed by growth of 13% next year. While this is a positive outlook, the stock has a price-to-earnings (P/E) ratio of 37, even after its recent decline. As such, it seems to lack a margin of safety and may be worth avoiding.

Recovery potential

As mentioned, SSE faces a number of risks which appear to have contributed to a decline in its share price in recent months. Perhaps its most pressing challenge is the disappointing financial performance which has been recorded in recent quarters. The company released a profit warning in September, with the impact of a price cap on variable tariffs and poor weather conditions being major contributors. The business is also facing uncertainty in terms of its strategy, with plans to merge its energy supply operations with Npower being scrapped.

While SSE has experienced a disappointing period, it may now appeal to value investors. The stock trades on a P/E ratio of 9.8, which suggests that investors have factored in the potential for further challenges. It has a dividend yield of 7.5%, and is expected to raise shareholder payouts by at least as much as inflation over the medium term.

As such, the income and value potential of the stock seems to be high. Certainly, it may be unable to provide a resilient and robust investment opportunity during what is proving to be a turbulent period for the FTSE 100. But from a recovery perspective, it could deliver high returns over the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of SSE. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

3 value shares for investors to consider buying in 2025

Some value shares blew the roof off during 2024, so here are three promising candidates for investors to consider next…

Read more »

Investing Articles

Can this takeover news give Aviva shares the boost we’ve been waiting for?

Aviva shares barely move as news of the agreed takeover of Direct Line emerges. Shareholders might not see it as…

Read more »

Investing Articles

2 cheap FTSE 250 growth shares to consider in 2025!

These FTSE 250 shares have excellent long-term investment potential, says Royston Wild. Here's why he thinks they might also be…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Has the 2024 Scottish Mortgage share price rise gone under the radar?

The Scottish Mortgage share price rise has meant a good year for the trust so far, but not as good…

Read more »

Investing Articles

Will the easyJet share price hit £10 in 2025?

easyJet has been trading well with rising earnings, which reflects in the elevated share price, but there may be more…

Read more »

Investing Articles

2 FTSE shares I won’t touch with a bargepole in 2025

The FTSE 100 and the FTSE 250 have some quality stocks. But there are others that Stephen Wright thinks he…

Read more »

Dividend Shares

How investing £15 a day could yield £3.4k in annual passive income

Jon Smith flags up how by accumulating regular modest amounts and investing in dividend shares, an investor can build passive…

Read more »

Investing Articles

Could this be the FTSE 100’s best bargain for 2025?

The FTSE 100 is full of cheap stocks but there’s one in particular that our writer believes has the potential…

Read more »