These large-cap shares are out of favour with analysts. Should you also write them off, or could they come back strong?
Sometimes the market changes its mind about a company. When this happens, the price change can be huge.
If the market dismisses a company's prospects unfairly then an opportunity is created for investors that have done their research. A good example of this is Next (LSE: NXT). Two years ago, the company's share price suggested that its growth was past. Next continued to grow sales and profits. Market perceptions turned; the shares are up 82% in 18 months.
Using consensus analyst recommendations, I searched the market for the large companies that are currently the least popular. In the table below, a consensus recommendation of 5 would be unanimous 'Strong Sells', while a score of 1 would be all 'Strong Buys':
|Company||Broker consensus recommendation||Price (p)||P/E (forecast)||Yield (forecast, %)||Market cap (£m)|
|J Sainsbury (LSE: SBRY)||3.1||346||11.9||4.7||6,523|
|Bunzl (LSE: BNZL)||3.2||1118||15.5||2.5||3,705|
|Admiral (LSE: ADM)||3.2||1066||11.8||8.0||2,892|
|Capital Shopping Centres (LSE: CSCG)||3.1||333||20.4||4.5||2,877|
|Cobham (LSE: COB)||3.1||223||10.8||3.8||2,399|
|PZ Cussons (LSE: PZC)||3.6||302||18.7||2.4||1,294|
|FirstGroup (LSE: FGP)||3.2||242||7.8||10.3||1,166|
|Lonmin (LSE: LMI)||3.4||560||N/A*||0.4||1,135|
|Michael Page International (LSE: MPI)||3.1||358||23.3||2.8||1,085|
|Electrocomponents (LSE: ECM)||3.2||201||11.6||5.9||878|
Data from Stockopedia
* no figure available
Four stood out in particular.
1) J Sainsbury
Written off in the past, Sainsbury's is now catching up fast. The supermarket has been increasing sales one quarter after another for eight years. The shares now trade at their highest point in over a year.
The most encouraging aspect of Sainsbury's renaissance has been its success in growing market share. The most recent survey from Kantar Worldpanel showed Sainsbury's has a 16.6% share of the domestic groceries market.
Despite this success and peer outperformance, few analysts currently rate Sainsbury's shares a buy. It could be that confidence in the sector as a whole has been hit by turbulence at Tesco (LSE: TSCO). Alternatively, the market may be expecting Sainsbury's purple patch will be short lived. The market has polarised in recent years towards luxury (Waitrose) and budget (Lidl, Aldi). Will the middle-of-the-range retailers remain dominant in the long term?
Sainsbury's is expected to pay a 16.4p dividend for 2013, equating to a yield of 4.7%. Earnings are forecast to advance by 3%, meaning that the shares currently trade on 11.9 times forecast profits.
FirstGroup runs a number of bus and rail services across the UK.
Shares in FirstGroup fell recently on the news that it might lose the West Coast rail franchise (it was expected to start running the franchise in December). For this reason, forecasts on FirstGroup's future profitability are not reliable.
It appears, however, that this possible loss is no fault of FirstGroup's. The question for investors is what FirstGroup's long-term profitability will be without the West Coast operations.
Looking back, FirstGroup delivered an operating profit of £448m for 2012. This translated to 31.2p of earnings per share (eps) and a dividend of 23.7p. That equals a historic price-to-earnings (P/E) ratio and yield of 7.8 and 9.8% respectively.
Debts at FirstGroup are high in relation to the company's market cap. However, this type of business typically delivers reliable cash flows and faces little competition. The recent kerfuffle may be an excellent opportunity to grab a high-yielding transport operator at a temporarily depressed price.
Admiral Group is one of the few FTSE 100 (UKX) companies that is less than 50 years old. It is also one of a small number of listed companies that is headquartered in Wales. I've recently been looking at Admiral ahead of the IPO of its competitor, Direct Line.
Admiral operates a number of insurance brands such as elephant.co.uk, confused.com and, of course, Admiral. The sector has fallen out of favour in recent months -- many market commentators have expressed concerns over the long-term profitability of the car insurance industry. These concerns have pushed down share valuations.
I think the market may be too mean in its appraisal of Admiral. After all, this is a very successful company: Admiral has increased its shareholder dividend every year since 2005, while its sales in 2011 were more than double the number achieved in 2008.
In short, Admiral's management has a better record of operating in this industry than investment analysts have of forecasting its future.
4) Michael Page International
Recruitment companies are a geared play on the economy. When employment is rising, new hires (and pay) increases. In a recession, this process goes into reverse and profitability falls hard.
In 2007, before the worst of the financial crisis, Michael Page made an operating profit of £149m. For 2009, this figure fell to just £20m.
Employment in the UK and USA has been rising recently. However, progress has been unconvincing and business confidence remains low.
Within the last year, analysts' profit forecasts for Michael Page have halved. Today, the company is expected to deliver eps of 15.4p for 2012. The dividend is expected to be held at 10p, meaning that the shares yield 2.8%.
Forecasting the economy over the medium term is more difficult than analysts will admit. Michael Page's share price suggests that the market thinks its difficulties are temporary. With the shares trading on 23.3 times the consensus forecast for 2012, shareholders could be very disappointed if the recruitment market doesn't show signs of life soon.
Warren Buffett is probably the world's greatest living investor. Mr Buffett was famously quoted saying that the time to buy shares is when other people are fearful. Though the analyst community might currently be worrying about the future of the ten companies above, would Buffett be a buyer? He certainly has been buying shares in one UK listed company recently. Find out which one in the free Motley Fool report "The One UK Share Warren Buffett Loves". The report will be sent to your inbox immediately.
Investing is by no means easy in today's uncertain economy. That's why we've published "Top Sectors Of 2012""Top Sectors Of 2012"-- our guide to three favourable industries. This free report will be dispatched immediately to your inbox.
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> David does not own shares in any of the above companies. The Motley Fool owns shares in Tesco.