Is Neil Woodford bullish or bearish on fallen angels Next plc and Capita plc?

When I wrote in August about the changing face of Neil Woodford's portfolio, he held only nine FTSE 100 companies in his funds. These included high street stalwart Next(LSE: NXT) and outsourcing specialist Capita(LSE: CPI).

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Last month, the struggling retailer released half-year results and Capita issued a profit warning. Is Woodford now bullish or bearish on these two fallen angels? His flagship equity income fund has just published its latest monthly update, so let's see.

A great opportunity?

In an announcement on 29 September, Capita said: "Our performance in the second half of the year to date has been below expectations, as a result of a slowdown in specific trading businesses, one-off costs incurred on the Transport for London congestion charging contract and continued delays in client decision-making."

The company said it now expects pre-tax profit for the year to be in a range of £535m to £555m, compared with a City consensus forecast of £614m. The news sent the shares crashing 27% on the day.

Woodford and his team met Capita's management "to delve more deeply into the issues that the company faces," and came away "reassured that the company is already doing some of the things it needs to do in order to restore the business to a healthier growth trajectory."

Furthermore, while the profit warning prompted some analysts to question the sustainability of Capita's dividend and to suggest a dilutive rights issue may be in the pipeline, Woodford and his team tell us: "We are confident that the dividend is safe and that an equity issue will not be required."

Woodford added to his holding in the company on the basis that "as is so often the case in these situations, the market's reaction looks disproportionate."

Capita's shares remain depressed at 614p. The forward P/E is firmly in value territory, being below 10, while the dividend yield is a juicy 5.2%, based on a payout maintained at last year's level. So, if Woodford's assessment is on the mark, now could be a great opportunity to buy a slice of this business.

Very appealing?

About this time last year, Next's shares were hitting a new all-time high of 8,000p. However, the company has faced a number of difficulties since then and the shares have declined to a current 4,810p.

The market is concerned by the generally challenging retail environment and the impact that price rises, due to the weakness of sterling, may have on consumer behaviour. Woodford believes Next remains a top-class retailer and having increased his holding in the company on several occasions as the shares declined earlier this year, added again in the aftermath of the Brexit vote.

Spells of unseasonable weather haven't helped its performance, but as Woodford's latest fund update stresses, this is "not something that affects Next's ability to deliver attractive long-term returns to its investors, in our view."

Is Neil Woodford bullish or bearish on fallen angels Next plc and Capita plc?In it's half-year results, Next reiterated its full-year guidance of pre-tax profit of £775m to £845m and earnings per share of -2.5% to +6.3%. We're looking at a P/E of between 10.2 and 11.1, while City dividend expectations give a yield of 3.8%. Its value credentials aren't quite as strong as Capita's but are still very appealing, if Woodford's right about the company's long-term prospects.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.