The optimism that pushed the FTSE 100 up above 7,000 points a mere week ago seems to have evaporated, with the index of top UK stocks back as low as 6,780 as I write. The pessimism seems to be extending to individual companies too, with forecasts being cut back across the board.
Royal Bank of Scotland (LSE: RBS)(NYSE: RBS.US) shares were doing nicely, but since 24 February the price has tumbled 14% to 341p, after 2014 full-year results failed to generate excitement. The bank finally recorded a profit, yet its still a long way from restarting its dividend payments theres a relatively meagre 0.5% yield forecast for this year with 2% penciled in for 2016, while rival Lloyds Banking Group looks set to provide 5.3% that year.
Those forecasts? Only a month ago the Citys experts were predicting EPS of 32.7p for 2015, and in the short time since thats been pared back to just 29.1p. For 2016 weve seen something similar, with a 32.5p forecast cut to 28.7p.
It looks like pundits and investors alike might be arriving at the conclusion I did some time ago RBS is overpriced compared to Lloyds, and is still more than a year behind in the recovery stakes.
Weak commodities prices have taken their toll on Rio all year, but now we have the added pain of tumbling forecasts. In the past week alone, the EPS consensus for 2015 has been pruned from 233p to 220p, with the 2016 figure lowered from 292p to 265p. The share price has responded to the increasingly gloomy outlook with a 20% fall from Augusts recent high, to 2,788p today.
But you know what? I reckon Rio Tinto is a steal now, with the shares dropping to a P/E of just 10.6 based on 2016 forecasts, and with dividend yields of 5.5% and 5.8% predicted for this year and next. And the analysts agree, with a big Buy consensus.
You know somethings up when forecasts for drinks giant Diageo (LSE: DGE) are being slimmed down, and thats whats been happening. Over the past year, EPS estimates for 2015 have been slashed all the way from 111p, through 95p three months ago, to 91.3p today and 2016 figures have dropped from 101p to 99p in just a month.
That would represent a further 4% EPS fall this year after a drop of 7% last, with only a modest 9% recovery on the cards for 2016. With dividends set to yield only around 3% and the shares on a P/E of about 20, I think Diageo shares are in the rare position of being overpriced right now.
Which is best?
Theres only one of these three Id buy right now, and thats Rio Tinto its an easy winner from this selection.
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Alan Oscroft 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.