Why I’d sell Centrica plc and this value stock

For a supposedly defensive company, Centrica (LSE: CNA) has taken a beating recently. On top of a 50% fall in the share price over the last five years, investors also suffered a dividend cut in 2014 and have yet to see an increase. 

The unloved shares now trade on a lowly forward P/E of 10.5 and offer a 7% yield. Could now be the time to buy? 

I’d say not, given the pressure on the core business. According to CEO Ian Conn, there are now 25 energy suppliers in the UK and 15 switching websites. It is easier than ever for customers to hunt for better deals and there are more companies competing on price than ever before. 

As a result, total customer account holdings in the UK fell 2% in the first-half of this year. That’s not a huge decline by any stretch, but I’m averse to investing in a declining business just for yield and I don’t see competition calming down any time soon. 

Further to this, the company has switched strategies a number of times in recent years. Its most recent flip-flop is the swing from heavily investing in, to downsizing, its oil exploration and production business after the oil price crash a few years ago. 

The resulting asset sale has admittedly strengthened the balance sheet, knocking 22% off of net debt, which now stands at a still sizeable £2.9bn, but surely long-term shareholders will be frustrated with the mismanaged venture. 

The threat of political intervention still hangs over the shares too. Theresa May reiterated her intention to cap energy prices at the Conservative party conference earlier this month and that has the potential to be bad news for Centrica. 

I prioritise a stable strategy and steer clear of potential political intervention when selecting dividend payers, so I wont be adding Centrica to my portfolio in the near future.

Volatile value stock

CareTech Holdings (LSE: CTH) is another value stock I’ll be steering clear of. It provides specialist social care including people with various learning disabilities, eating disorders and behavioural issues. A noble cause to be sure, but one that might not generate excellent shareholder returns in the long run.

The company negotiates its fees with local authorities on a yearly basis. The inability to set their own prices increases the chance that costs might outgrow revenues and I fear the highly politicised nature of healthcare services could lead to their exceptional profit margins being crimped deliberately in the future. 

Perhaps I’m too bearish on the stock. The specialist nature of the care provided helped the company achieve a near-20% operating margin in the first half of this year and perhaps means there are fewer competitors. The company also reported a good set of results today, including 93% occupancy levels in the mature estate and a net increase of 215 places available.

Perhaps the forward P/E of 12 shows the market is uncomfortable with the company’s significant net debt levels, which fell slightly to £147.2m over the period.