They may operate in vastly different sectors, but Ocado (LSE: OCDO), Anglo American (LSE: AAL) and Playtech (LSE: PTEC) have each found themselves in the crosshairs of negative investor sentiment over the past year. Going forward, are any of these three shares set to skyrocket?
In the case of struggling Anglo American, I would say the verdict is an emphatic no. The diversified miner may have seen share prices increase 30% over the past week, but that was mainly due to weakness in the US dollar and minor upticks in commodities prices leading to a short squeeze. I believe this rally will prove short-lived, especially once full-year results are announced later this month. This update on the companys dramatic restructuring plans will be pivotal.
If investor sentiment is negative then Anglo American faces the double-whammy of losing investment grade credit and being booted out of the FTSE 100 index, of which its the smallest member. The loss of investment grade credit would disallow many funds from investing and the loss of FTSE 100 status would force funds tracking the index to sell en masse. While Anglos mammoth restructuring effort may bear fruit in the long run, I dont see any light at the end of the tunnel for shares in the near term as long as commodities prices continue falling dramatically.
Little hope for margin growth
Online grocery delivery service Ocados latest results make it the near polar opposite of Anglo American. These latest results saw the 13th straight quarter of double-digit sales growth, record profits, and the maintenance of a very healthy balance sheet. However, investors are rightly worried about Ocados long-term prospects. Although the company has done well to increase revenues and geographic reach across the UK, its an open question as to whether it will ever be able to increase margins sufficiently to provide sustained and significant profits. The main reason for this is intense competition as traditional grocers and American juggernaut Amazon have entered the online food delivery business with gusto.
With margins already hovering at around 1%, a price war with these foes will prove devastating. Management has for years trotted out the possibility of a partnership with an overseas grocer, which would play into Ocados technological and logistical prowess, but we have yet to see any concrete evidence of this. Given these problems, I dont believe Ocado shares will increase in value significantly over the medium term unless they sign an international partnership or are bought outright by a competitor.
So many questions
Playtech is an interesting company to watch as failed bids to further expand into the financial trading sector leave the next step for the firm an unknown. The squashing of bids for Plus 500 and AvaTrade by regulators leaves the company with 240m in cash it raised from investors for the explicit purpose of acquisitions. In better news, the core business of providing software to gambling firms and running their online operations remains a very profitable and stable one. Year-on-year, revenue increased by a third and net profit by 19% on the back of 45% pre-tax operating margins. Share prices stagnated in 2015 over questions as to the viability of the expansion into financial trading, and where shares are headed next is an open question that should be answered later this month when full-year results are announced.
The long-term plan for Playtech remains nebulous, which is reason enough for me to avoid its shares for the time being. For investors seeking the upside potential of Playtech but looking for a more concrete path to achieve growth, the Motley Fool has recently released thisreport on A Top Growth Share.
This classic British brand has already proven its ability to grow by increasing sales every year since going public in 1997. With international expansion just now beginning, the Motley Fool’s analysts see the potential for 300% growth over the next decade.
To read your free, no obligation copy of this report simply follow this link.
Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.