Have these 2 stocks been unfairly punished by the market?

Sky is down 25% over the past year, and Direct Line Insurance Group is down 12%. Why is this and do we sense a buying opportunity?

Pie in the Sky

Sky (LSE: SKY) has really been the limit for investors over the past year. Its share price has fallen to earth, crashing 25% as its battles to fend off BT’s aggressive bid for a share of the football rights market. Sky has clung onto the prime slice of the Premier League, although it was forced to pay over the odds to do so. However, with early season viewing figures falling, this could end up a zero sum game.

The picture at Sky isn’t as bad as its share price might suggest. Its recent Q1 update showed 5% growth in like-for-like revenues to £3.1bn. It’s growing faster in its new European markets, 9% in Germany and Austria constant currency rates, and 13% in Italy. Brexit has helped: these euro revenues spiral to 29% and 34% respectively when converted into sterling. Given its UK experience I reckon Sky has an open goal in Europe, where the digital market is far less developed.

Hollow crown

Weaker sterling spells pain as well as gain, given spiralling German Bundesliga rights, which now cost Sky €876m a year. Sky also has to raise its game when it comes to creating original TV content, an expensive business with Netflix paying £100m for its two-series biopic The Crown. At the same time it’s trying to cut £300m worth of costs, while earnings per share are forecast to fall 10% in the year to 30 June 2017.

Sky isn’t dirt cheap despite its 25% share price tumble, trading at a forecast 13 times earnings and yielding 4.3%, but still looks a shining buy to me.

Direct action

In June, I described Direct Line Insurance Group (LSE: DLG) as a “surprise power play” thanks to share price growth of a whopping 77% over three years, against a 5% drop on the FTSE 100 over the same period. Now it’s surprising on the downside, having fallen almost 13% in the past 12 months.

Motor and home insurance is a tough place to do business. Competition is razor sharp and margins wafer thin, with all-conquering comparison sites making things even tougher. Most companies spend as much on claims as they get on premiums, and hope to make some kind of margin on cross-selling and investment gains. Two recent hikes in insurance premium tax, taking it from 6.5% to 10%, have made their job harder, as has the government’s repeated failure to tackle fraudulent whiplash claims. Yet customers still feel they’re being ripped off with sky-high premiums.

August’s results showed a £12.2m drop in operating profit to £323.6m, which was largely due to an £18.5m slump in investment gains. Bouncy post-Brexit markets may have reversed this but we’ll find out more next week, when the group publishes its Q3 trading update. Yielding 4% and trading at 13 times earnings, Direct Line is priced to go, even if it has lost some of its power to impress.