Weakness in the shares of Vodafone (LSE:VOD), Royal Mail (LSE: RMG) and National Grid (LSE: NG) offer a decent entry point for value hunters, it may be argued. There are caveats, however, and Vodafone remains one of my least favourite stocks in the FTSE 100. Here’s why.Â
Vodafone:Â Nothing New
It has been a disappointing year so far for Vodafone shareholders, with the stock down about 3%, which compares with +11.3% for domestic rival BT. Vodafone is down 10% since the one-year high it recorded in the second half of January, and a plummeting euro could bring much lower earnings this year, intensifying the pressure on its valuation.Â
Bearish analysts are partly to blame for the fall in the stock price, but the real problem is that Vodafone needs to have a clear strategy in place with regard to capital allocation — i.e. where its cash pile will be invested. While it’s no mystery that Vodafone may soon announce a large deal to buck the trend of declining wireless organic service revenues, its chief target — Liberty Global — doesn’t come very cheap.
So, Vodafone may have to pay a lot to please investors, just like BT did with EE, and to snap up those assets. A strategy based on organic growth is problematic, and I reiterate the view that Vodafone stock should be considered below 200p. It could be a bargain already, if only Vodafone decided to trim its dividend and redeem part of its outstanding debts. That’s unlikely to happen, though.Â
Challenging Times For National Grid & Royal Mail
I’d rather invest in National Grid than in Royal Mail, although I am not a big fan of utilities in the UK, due to political risk ahead of the elections in May.
Still, National Grid is by far my favourite pick in the space, in spite of a 6% drop year to date. Its current price of 853p a share indicates that the stock trades below fair value, so I’d certainly advise anybody to add 2% to 4% of National Grid to a diversified portfolio right now. Its valuation supports a rich dividend yield, in my view, and seasonal patterns suggest it would make a lot of sense to invest in this utility ahead of full-year results, which are due in the second half of May.
Based on multiples for earnings and cash flows, upside could be greater than 25% in the next 18 months. Â
Elsewhere, Royal Mail is faced with regulatory hurdles, and it’s unclear what benefits, if any, its latest deal with Amazon brings.Â
“A committee of British lawmakers on Thursday warned postal operator Royal Mail not to increase its prices to help the firm meet its state-mandated delivery obligations, and to instead focus on improving efficiency,” Reuters reported on Thursday, only a couple of weeks after Royal Mail said that the price of first and second class stamps would increase by 1 pence to 63p and 54p, respectively.
The group is trying to offset declining volumes for letters, but in doing so, it’s drawing lots of attention from regulators. Its relative valuation reflects a tough trading environment, and although the stock is not  incredibly expensive, it could be volatile for some time after a 25% drop in the last 12 months.
Personally, I’d avoid it.Â