Are these two former FTSE 100 favourites now oversold?
It's amazing how quickly sentiment towards a stock can change. In the blink of an eye a company can go from market darling to pariah. These two FTSE 100 companies were only recently were investor favourites, yet have seen their share prices plummet in 2016. Are they now oversold?
Retail giant Next (LSE: NXT) enjoyed an extraordinary run between 2008 and 2015, rising from below 900p to over 8,000p in seven years. The stock was a fund manager favourite as the company consistently increased margins, boosted earnings and paid out special dividends. I recall reading a report from a well-regarded research house last year stating that Next was in a league of its own in terms of quality and it fully deserved its premium rating.
Fast forward to today, and Next now trades at around 4,700p, after seeing over 40% wiped off its share price in less than 12 months. It released profit warnings in January and March this year and warned that 2016 may be its toughest year since 2008.
It seems many factors are affecting profitability at Next right now - consumers are avoiding the high street, competitors are stealing market share, Britons are spending less on clothing, warm weather has slowed sales, and the company is facing higher costs as a result of the decline in sterling. Add in the fact that it was priced for perfection, and the result has been a dramatic decline.
So will Next fall further or is the stock now in oversold territory?
On a historical P/E basis, Next certainly looks cheap right now. Between 2014 and 2015, the stock generally traded on a P/E of between 16 and 18. Now, it can be bought for a P/E ratio of just over 10. Furthermore, Next's dividend yield (not including the special dividends) has been pushed up to 3.4% after the share price decline, which is the highest it's been in a while.
To my mind, the company is starting to look tempting at the current share price, however questions arise as to whether growth at Next is over. It's a well-managed business with a strong balance sheet, however with the stock still trending down, I'm weary of trying to catch a falling knife.
It's a similar story at ITV (LSE: ITV), with a formidable rise in its share price between 2011 and 2015 as margins grew and earnings rose. However the upwards trend came to an abrupt end late last year and the stock is down 34% year-to-date.
Concerns over TV adspend have been the main driver of the share price weakness, although share sales from the CEO and CFO in recent months probably haven't helped sentiment.
City analysts anticipate earnings growing from 15p per share for FY2015 to 17p for FY2016 and dividends being lifted from 6p to 8p. However investors should bear in mind that ITV slashed its FY2008 dividend heavily during the Global Financial Crisis and paid no dividends at all for FY2009 and FY2010. Could a Brexit recession result in a similar situation?
On the current P/E ratio of 10.5 times next year's earnings, ITV looks to be trading at a reasonable valuation, but investors should be aware that if the economy does take a significant downturn, ITV could suffer and dividends may dry up.
Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended ITV. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.