The FTSE 100 is at around 6,050, as I write down over 1,000 points (15%) from its all-time high of April. The sale signs are up, and Im on the hunt for blue-chip bargains.
Vodafones shares, at 220p, are down 14% from their 52-week high so, a decline broadly in line with the Footsies. However, it is worth noting that the high at the end of May was made on the back of speculation that Vodafone was set to receive a takeover bid from US group Liberty Global. The shares fell back somewhat when Vodafone said a few days later that it was in early discussions with Liberty, but only about a possible exchange of selected assets.
Despite the 14% fall from the bid-speculation peak, Vodafone remains one of the most expensively-rated stocks in the market. Current-year earnings forecasts of City analysts put the company on an eye-watering price-to-earnings (P/E) ratio of 42; and, while strong earnings growth of 20% is forecast for next year, that only brings the P/E down to around 35. It would take about five years of 20% earnings growth and no change in the share price for Vodafones P/E to come down to the long-term FTSE 100 average of 16. As such, I just dont see the company as a good value proposition at the present time.
Defensive businesses, such as utility National Grid, can generally be expected to perform better than the average stock in a falling market. For example, during the 2007-2009 bear market, while the FTSE 100 plunged 48%, National Grids shares declined a far less extreme 27%.
The groups shares have held up relatively well over the past week. Nevertheless, at 834p, they are down 13% from their 52-week high. So, National Grid looks an interesting proposition for investors, as a defensive stock that is well off its peak. Earnings and dividends are expected to tick modestly higher ahead of inflation in the next few years. For the current year, City analysts forecasts give a P/E of 14.2 with a dividend yield of 5.3%. For next year, the P/E falls to 13.8, with the yield rising to 5.4%. As such, National Grid looks a good buy to me right now for investors seeking a slow-and-steady core holding for a portfolio.
Clothing retailer NEXT has for a long time been one of the best businesses on the high street both operationally and in delivering value for shareholders. Im not particularly surprised to see this quality stock, at 7,630p, off a mere 5% from its 52-week high. Performance has no doubt been helped by a trading update at the end of last month in which management upped its sales and profit guidance for the current year.
City analysts forecasts put the company on a P/E of 17.6, falling to 16.5 next year. Clothing retailers can suffer the occasional wobble from such things as unseasonable weather, providing investors with an opportunity to pick the shares up more cheaply, but waiting for such an opportunity can be a gamble. In the case of NEXT, a 5% discount from the stocks recent high and reasonable earnings ratings for a quality business are sufficient to suggest this is a decent buying opportunity.
Finally, I can tell you that only one companies I’ve discussed in this article has made it into an elite group of five stocks identified by our analysts as businesses with superior long-term prospects in this FREE Motley Fool report.
Our analysts are confident the five chosen firms have what it takes to deliver outstanding performance for investors through thick and thin. In fact, such is their conviction about the quality of these businesses that they’ve called the report “5 Shares To Retire On“.
You can download this free no-obligation report right now — simply click here.
G A Chester 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.