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.
The post Should I buy April’s 2 worst-performing UK stocks in May? appeared first on The Motley Fool UK.
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As the Rentokil share price dips on Q1 news, I ask if it’s time to buy
I want nothing to do with this FTSE 100 disaster!
Harvey Jones has positions in JD Sports Fashion. 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.
