Catching a falling knife is always a hazardous business, but very impressive if you get your timing right. These are the two of thesharpest and swiftestblades on the FTSE 100, should you make a grab for them?
BT or not BT?
Telecoms giant BT Group (LSE: BT.A) plungedmore than 20% from 382p to 300p afternews of the accounting scandal in itsItalian division broke. Investors fled over fears that this was the smalltip of a large iceberg, as so often happenswith this type of scandal. Yet the panic has abated in recent days, with the share price up1% over the past week.
There was some good news buried in its recentquarterlies, notablythe 32% rise inrevenue to 6.12bn, but itwas rightlyovershadowed by the rise inanticipated Italian writedowns from 145m to a whopping530m. However,you cant blame all of BTsproblems on foreign misdemeanours, the outlook for itsUK business is also fragile, with revenues for 2016 and 2017 expected to be flat.
Pain or gain?
As if that wasnt enough, BTalso has to tackleits rising debt and pension deficits, which now stand at 9bn and 11.1bn respectively. If theseget out of hand, the dividend could come under pressure. JLT Employee Benefits recently calculated that almosthalf of all FTSE 100 companiescould clear their pension deficits with one years dividend. That kind of talk could start a trend, one that would triggerfurtherpain for shareholders if BT acted on it.
At todays 307p, BTs stockis 38% down from its year-week high of 496p, which many will see as a buying opportunity. However, you must first weigh a hostof threats, notablythe rising cost of bidding for Premier League rights, which has just cost rival Sky an extra 314m, smashing operating profits. Todays 4.56% dividend looks juicy, but cantwholly be relied on. A forecastvaluation of 9.3 times earnings looks tempting, but theres a reason BT trades so cheaply. Mind yourfingers!
High street retailer Next (LSE: NXT) has demonstratedthe danger of reaching fora falling knife. Its flashing blade has fallen three times since March last year, reducing its share price from ahigh of 7,110p to todays 3,890p, a drop of 45%. So could it be third time lucky?
Next was hammered in early January after posting lower than expected sales over the crucial Christmas period, with management warning of further weakness to come. Retailer-unfriendly weather, changing consumer shopping patterns and the rising cost of imported textiles due to the weaker pound combined to give it a thumping.
Further Brexit certainty will do it nofavours as consumer confidence looks fragile in the face of rising inflation generally.Shoppers may bereluctant to payhigher prices, making it harder forNext to pass on its risingcosts.
As with BT, the worst of the selling is over for now. A valuation of 8.75 times earnings and yield of 4.05% look tempting. Nexts margins are forecastto fall, but should still remain a healthy 17.3%. For those withstrong nervesand the patience to hold on for a recovery, this would be my catch of the day.
Clutchingat falling knives is oneway to get rich from stocks and shares, but there are far safer and potentially morerewardingstrategies out there.
This FREE Motley Fool report,10 Steps To Making A Million In The Market, sets out how investing in stocks and shares over the long-term can make you rich.
You don’t have to be a share picking genius, ordinary people can become astonishingly wealthy by investing in stocks and shares.
This no-obligation report shows you how to do it, step-by-step. To find out more, click here now.
Harvey Jones 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.