One of the challenges of investing is deciding whether to buy a company which has performed poorly in the past. Thats because no companys shares fall without good reason. This could be an internal factor such as declining profitability, or an external factor such as a challenging operating environment.
In the case of Morrisons (LSE: MRW), the problem is mostly external. Certainly, its strategy of recent years was rather lacking, with it being very late to the online and convenience store party and now deciding under new management to undo much of the progress which has been made in recent years. However, by concentrating on its core operations and refocusing on what made Morrisons a successful business in the first place, namely good value products with a vertically integrated supply chain, it could begin to make a successful turnaround.
Furthermore, the external problem of a changing supermarket sector could begin to improve for Morrisons. Thats because UK household budgets are not under the same degree of pressure as they were during recent years, with wage growth now being positive and higher than inflation. This could be the catalyst to reverse the change in shopping habits towards discount, no-frills operators such as Aldi and Lidl and back towards the likes of Morrisons. With the latter trading on a price to earnings growth (PEG) ratio of 0.7, it appears to offer a wide margin of safety and looks set to post impressive share prices rises over the long run.
Meanwhile, mobile payment solutions specialist Monitise (LSE: MONI) appears to have mostly internal problems. Thats because the industry in which it is operating is becoming increasingly popular, with the company having been able to win major blue-chip clients and create a slick, highly useable platform which has generally been popular with customers.
However, Monitise has not yet been able to turn a successful product into a successful business. This has led to major declines in investor sentiment and, with key shareholder Visa selling up, market confidence in the company has been shaken. Furthermore, Monitises CEO recently announced her resignation and, looking ahead, the company may struggle to improve its financial outlook with competition in the sector set to increase.
Todays update from Melrose (LSE: MRO) indicates that the acquirer of industrial assets sees opportunity at the present time. In fact, its response to the weakness seen in the industrial sector of late is to become more bullish on takeover prospects, which bodes well for its investors and indicates that there could be a number of undervalued assets on offer over the medium term.
Although Melrose has a sound business model and a bright future, it now expects near-term profitability to be towards the lower end of previous guidance. Thats at least partly because of challenging market conditions and, with the companys shares trading on a price to earnings (P/E) ratio of 17.9, it may be best to wait for a keener share price before buying a slice of the business.
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