The FTSE 100 has rallied over 600 points (10%) since its midsummer low of around 6,030.
Not all companies have joined in the great rally. As a contrarian investor, I’m always interested in stocks that are out of favour, because unloved shares have the potential to be some of the best long-term investments.
SSE (LSE: SSE) (NASDAQOTH: SSEZY.US), RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US) and Vedanta Resources (LSE: VED) have all lagged the market. Are they now good value?
SSE
This utility company’s shares, recently trading at 1,402p, are 5% lower than five months ago, and 16% down on their 52-week high.
The market has been rattled by recent political sabre-rattling towards utility companies. In particular, Ed Milliband told last month’s Labour Party conference he intends to put a two-year freeze on gas and electricity bills if Labour wins the 2015 election.
SSE this week announced an expected fall in profit for the first half of the year. However, an 8.2% hike in the bills of the company’s 10 million customers also kicks in from this week, and the board remains committed to its policy of delivering annual RPI inflation-beating dividend increases.
I believe the market is being overly gloomy about the political posturing, and that the recent share price weakness, which has pushed SSE’s forecast dividend yield up to 6.3%, provides an attractive opportunity for income investors.
Vedanta Resources
Shares of this mining, oil and power group, recently changing hands at 1,015p, are 9% down over the period of the Footsie’s 10% rise, and 24% down on their 52-week high.
Vedanta reported record oil and gas production, and some production increases among its mining and power operations within a second-quarter production update released last month.
However, like other resources companies, it’s not volumes that are the problem at the moment but revenues and profits. Weakness in metals prices and input-cost inflation have been taking their toll — and the market didn’t so much as blink when the company reported revenues down 17% and underlying earnings per share down 70% within first-half results released today.
Ahead of the results, analyst earnings expectations for the year ending March 2014 put Vedanta on a price-to-earnings (P/E) ratio of 20. However, the P/E falls to a much more attractive 10 on forecasts of a big earnings bounceback the following year.
RSA Insurance
At 104p, this insurance company’s shares are trading at a 52-week low –12% down over the last five months and 24% down on their year high.
RSA announced last week that severe weather losses for the year would be materially worse than previous planning assumptions. More damningly for the share price came news at the weekend that the company had suspended the chief executive and two other directors of its Irish business as a result of “issues in the Irish claims and finance functions which were identified during a routine internal audit”.
RSA reckons this year’s profits will be £70m below previous market expectations, but says: “Whilst these issues are serious, they do not have a material, long term impact on the Group”. The fall in the shares has pushed RSA’s prospective dividend yield well above 5%, but it should be noted that the company has been a serial dividend-cutter over the last decade and a half.