Thomas Cook (LSE: TCG)andBarclays(LSE: BARC) are very different businesses, of course, but recent eventssurrounding Thomas Cook point to plenty of downside for Barclays shareholders. Heres why.
The sudden departure ofHarriet Green,who led Thomas Cook for less than three years, seems to be the reason why Thomas Cooks stock price has been highly volatile in recent days.
Of course, thin underlying margins leave the travel agent exposed to the vagaries of the global economy, but Thomas Cooks financial position has materially improved in the last couple of years.Net debt almost halved to 421m between 2012 and 2013, and trendspoint to a manageable net leverage position in the next year or so.
Thomas Cook is paying more attention to its short-term liquidity needs, which is also a good thing. Still, itsstock slumped to almost 100p last week, trading around a 52-week low. Why so?
Only a few days ago, according to forecasts from brokers, Thomas Cooks average price target stood at 200p but that has now come down to 154p. Top-end estimates, meanwhile, have come down to 200p from 250p.
There has always been a problem with market consensus estimates for Thomas Cook, however: the spread between the mean price target from brokers and Thomas Cooksstock price has widened from 8p to 100p between March and mid-October.
When this happens, either consensus estimates come down, or the shares starts to rally or both plunge, but changes in consensus estimates tend to be more painful. Theshares currently change hands at 125p, so the spreadis roughly 30p.
Thomas Cook is a high-risk equity investment for opportunistic traders, yet based on fundamentals and trading multiples, its shares should be included in a diversified portfolio.
Barclays Rises
The spreadbetween the mean price target from brokers andBarclays stock price has significantly narrowed since it reach 70p earlier this summer, and now stands at 40p. As Barclays stock rallies (+18% since mid-October), little evidence suggests that Barclays has become a more solid investment proposition.
As in Thomas Cooks case, it looks a lot like market expectations are too high. Brokers have become more bullish about Barclays in recent weeks, although the banks fundamentals have not significantly improved in recent times.
Meanwhile,headline risk is still something that could have a significant impact on the valuation of Barclays stock. Several problems remain unsolved: from unwanted assets held on the balance sheet and precarious capital ratios to a tough competitive and regulatory environment, which will not help the bank deliver long-term value to shareholders, in my opinion. Unless, that is, market estimates continue to rise.
Thomas Cook and Barclays offer much less upside than the top three stocks mentionedin our latest wealth report, whichis completely freefor a limited amount of time.
On average, these three investments have recorded apre-tax return north of 10%,excluding dividends, in the last five years — and they will likely continue to be top performers in this environment. Learn more about them and their prospects right away bysimply clicking here.
Ourad-hoc reportcomeswithoutfurtherobligation. Download it now!
Alessandro Pasetti 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.
