Many markets have suffered in the past six months as inflation has hit levels not seen in more than 30 years and the war in Ukraine adding to already fractious geopolitical landscape.
As a result, many investors have sold out of the equities market, with companies in the “growth” camp of investing (that have the potential to increase their earnings rapidly over the coming years) taking the biggest hit, as investors stop betting on future growth and looking for “value” companies with turnaround potential.
This turnaround has benefited the FSTE 100 index of the UK’s largest companies, which has managed to make a modest increase of 1.2% since the start of the year.
However, within this the market has diverged wildly. While oil and miners have soared on the back of rising prices, other stocks have plummeted.
Some were too expensive and needed a sell-off, but others have been dumped despite strong balance sheets and relatively cheap starting valuations. As such, not all stocks that have dropped have deserved their falls.
Source: AJ Bell
The share price that has suffered the biggest decline so far this year came from the grocery delivery service, Ocado, which is down 49%, according to data from AJ Bell.
Sales were boosted in 2021 by more customers making home delivery orders in lieu of journeying to physical supermarkets, but profits have declined post-pandemic.
In the first quarter, sales in the ‘Ocado Retail’ branch of the company (a joint venture with Marks & Spencer) declined 5.7% to £564.7m.
Orders increased 11.6% on a weekly average, but high inflation meant that customers were reducing the size of their basket by 15%.
The cost-of-living crisis will continue to be a barrier for the company as consumers reign in their spending according to Matt Britzman, equity analyst at Hargreaves Lansdown, who added that the company will have to offset “significant increases” to costs by charging customers higher prices.
He said: “There’s also further progress being made on same-day delivery capacity, which should be a real positive if the group can deliver well on that proposition. But there’s no getting away from the fact the near term looks challenging, and the market reaction is a consequence of that.”
In fact, Fahad Hassan, chief investment officer at Albemarle Street Partners, said that all consumer businesses are likely to “face severe headwinds in the coming months” as UK inflation exceeds 9.1%.
He added: “We would avoid Ocado as we believe the stock is still highly priced and faces scaling risk as it ramps up spending on new distribution centres. The capital intensity of the solutions business is an issue at a time when the cost of capital is rising.”
However, it’s not all doom and gloom – Hassan said that “while some have rightly come under pressure, due to slowing revenues and a risk to margins, others look attractive given their ability to weather the inflation storm”.
One such company is the safety equipment company, Halma, which suffered a 36.6% decline in share price this year, making it the 9th biggest loser on the FTSE 100 since December 31st, according to the data.
It’s core business does not require a huge amount of internal investment to continue generating revenue, which puts it at less risk from rising inflation and operating costs, according to Hassan.
At the end of its last financial year in the March, Halma announced a 16% rise in revenues and 14% increase to profits: its 19th consecutive year of record profits.
Hassan said: “We believe stocks such as Halma should be considered after a period of derating as the company is exposed to faster-than-GDP revenue growth, with low capital requirements for its core business”
Even though it recorded a strong £1.5bn in profits across the year, the share price may have been dragged down on the same wave as others in the healthcare and technology sectors.
However, Halma took advantage of these lower prices in the market and bought a total of 13 new companies over the period including the childbirth technology business, PeriGen, for £40m and fire system maker, Ramtech, at £16m.
“A period of market dislocation has allowed management to add value through bolt on acquisition,” Hassan added.
Opportunities can also be found in the industrial equipment rental company, Ashstead Group, which had the 5th highest drawdown in the FTSE 100 this year, down 39.7%.
Hassan likes its large exposure to the sizable US market, and although the sector can be “notoriously cyclical,” he expected revenues to remain high from many ongoing building projects.
Likewise, the company is likely to “benefit from a secular shift toward renting”.
He added: “Higher interest rates push clients to reconsider the use of capital, allowing faster top line growth. Like Halma, Ashtead Group is a savvy consolidator and is likely to use a slowdown to acquire revenues.”