Earlier this week, shares of online stock broker Hargreaves Lansdown (LSE: HL) slipped after the company reported a 6% decline in assets under administration and a 24% decline in new business in the first half of its financial year.
As well as a slowdown in new business, profit margins are also coming under pressure. Operating costs increased 19% during the period, more than revenues, which only grew 9%, leading to a reduction in the overall operating margin of 400 basis points.
Unfortunately for investors, I think this could be just the start of a much more severe downturn for Hargreaves. The company is one of the most profitable in the asset management space, having achieved an average operating profit margin of around 60% for the past five years. In comparison, wealth managers and stockbrokers such as Charles Stanley and Rathbone Brothers report operating margins in the region of 10% to 25%.
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Granted, there are some significant differences between these companies’ business models, which means old-school brokers such as Charles Stanley have higher costs and thinner margins, but Hargreaves has come under attack repeatedly in the past due to the high fees it charges to customers.
Further to fall
I think customers are now starting to wake up to the firm’s above-average charges and this could mean the end of Hargreaves’ sector-leading margins. And as margins fall, I reckon it is going to become harder and harder for the stock to hold its elevated valuation.
Shares in Hargreaves are currently trading at a forward P/E of 29, almost double the banking and insurance sector average. With this being the case, I think the stock could fall by 50% or more in 2019 if the bad news continues.
But Hargreaves isn’t the only FTSE 100 stock that I’m avoiding in 2019. I reckon shares in Segro (LSE: SGRO) could also be in for a hard time.
Getting ahead of itself
Segro is one of the UK’s largest listed real estate investment trusts (REITs). The company owns a portfolio of properties in the UK, primarily warehouse properties. Recently, as the country gears up for Brexit, investors have rushed to buy the shares because Segro is one of the few companies that are likely to benefit from the divorce as businesses use its warehouses to stockpile products, in an attempt to minimise disruption in the event of a no-deal Brexit. The rush to buy has sent the stock surging by 10% since the beginning of the year.
However, following this rally, the stock is now trading at a premium of around 8% to its last published net asset value of 603p per share.
With this being the case, I think it’s going to be difficult for the stock to advance any further, and the shares could even fall back to the net asset value if we get a Brexit deal and the demand for storage space falls.
A dividend yield does sweeten the deal here, although, at just 2.8%, I don’t think it is enough to offset the potential capital losses investors could suffer.
