However, the stock is still a long way from its all-time high of 590p. This was recorded in 2007 when the prospects for the UK economy were relatively bright and the company was the subject of potential bid approaches. Looking ahead, could it return to those highs over the medium term?

Mixed outlook

The prospects for the UK supermarket sector remain exceptionally challenging. Consumer confidence has been weak for a number of months and is expected to remain so over the near term. Brexit seems to be having a negative impact on spending habits in the UK. Although wage growth has now edged higher than inflation, this means that disposable incomes are growing in real terms. However, consumer confidence remains relatively weak.

Looking ahead, this situation could continue over the medium term. This could hurt Sainsbury’s growth prospects, with budget retailers such as Lidl and Aldi likely to enjoy further growth in such a scenario.

However, the Sainsbury’s/Asda merger could provide the enlarged business with a competitive advantage in terms of costs versus rivals. At a time when consumers are increasingly price conscious, this may help to support higher margins for the business versus peers. It could help to stimulate profit growth, with the market expecting growth in earnings of 6% in the next financial year.

Further profit growth could be ahead, while a forward dividend yield of 3.5% suggests that continued share price growth could be delivered. A share price of 590p seems unlikely in the medium term, but Sainsbury’s could outperform the FTSE 100 despite Brexit risks over the next few years.

Challenging outlook

While Sainsbury’s seems to offer investment potential, retail sector peer Game Digital (LSE: GMD) could experience a challenging outlook. The company reported a year-end trading update on Tuesday which showed that its gross transaction value increased by 1.8% in the year to 28 July. Its UK performance was disappointing, with a 1% fall in gross transaction value, while 7% growth in Spain helped to offset this.

Looking ahead, cost savings could help to improve the financial performance of the business. Its collaboration agreement with Sports Direct on the BELONG experienced-based gaming activity could act as a catalyst on its future performance, with growth acceleration planned in the current financial year.

Despite this, Game Digital is expected to remain loss-making in the 2019 financial year. It continues to face a difficult market environment, and this could lead to a decline in investor sentiment. With the company appearing to lack a competitive advantage versus peers, it seems to be a stock to avoid at the present time.

The post Can the Sainsbury’s share price ever return to 590p? appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Sainsbury (J). The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The reason for investor caution is clear. The company is drowning in debt. At the end of 2017, JackpotJoy had an adjusted net debt balance of £387m and an adjusted leverage ratio of 3.6 times.

However, while the debt mountain is concerning, JackpotJoy is a cash cow and it’s rapidly paying off creditors. The company generated a free cash flow from operations of £97.8m last year, giving a free cash flow yield of 15.5%. 

Management is committed to cleaning up the balance sheet over the next few years and it has the resources to do so. A recent trading update declared that revenues during the first two months of 2018 have increased by 12%. That puts the company on track to generate a similar debt-reduction performance again in 2018, as well as meeting other obligations.

And once debt is brought down to a more sustainable level, I believe JackpotJoy will start returning excess cash to investors, so this could also be a future dividend champion.

Less than cash 

Another out-of-favour recovery play I like is Game Digital (LSE: GMD).

Like many of its high street peers, Game is suffering from its high fixed cost base (rental leases), rising costs overall, as well as shifting consumer shopping habits. These pressures resulted in the group announcing a 56% decline in profit before tax from its core retail operations for the 26 weeks ended 27 January. 

Thanks to a positive £2.6m contribution from its growing Esports business for the period, overall profit only declined 26%. But more importantly, Game generated £32.2m in cash from operations during the period, up 25.3% year-on-year. 

Game ended the period with £85m in cash and equivalents with almost no debt, compared to a market capitalisation of £63.6m at the time of writing. Put simply, the company as a whole is now worth less than the value of cash on its balance sheet, making it a traditional value play.

Including intangible assets, the shares are trading at a price-to-book value of 0.5.

Misleading figures 

My final ‘absurdly cheap’ pick is motor retail and aftersales company Lookers (LSE: LOOK). 

Shares in this car dealer have lost more than 27% of their value over the past 12 months because of concerns about the state of the car market in the UK. Indeed, after years of above-average growth, fuelled by easy credit, new car sales slumped 15.7% in March, extending the run of falling sales to 12 months. As a result, fearing bad news ahead, investors have fled car stocks.

I believe this presents an excellent opportunity for value investors. You see, while headline numbers show car sales in the UK are collapsing, according to official figures from the Department of Transport the average age of vehicles on Britain’s roads is now more than eight years, its highest level since the turn of the century. Nearly 20% of cars are at least 13 years’ old. Sooner or later, drivers will have to replace these vehicles. 

And when sales growth does pick up, shares in Lookers could see a substantial re-rating. The stock is currently trading at a forward P/E of 6.7, which, in my opinion, is factoring in the worst case scenario and leaves no room for positive surprises.

The post I believe these 3 stocks are absurdly cheap right now appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Mike Ashley bets on esports

To complement its popular Insomnia live gaming event, Game Digital has been rolling out an in-store gaming arena format, branded BELONG. The pace of this rollout has been cautious so far, with just 19 arenas in the UK out of nearly 300 UK stores.

That’s about to change. Sports Direct — which has a 25.75% shareholding in the business — is going to provide up to £55m of debt funding for an accelerated rollout of BELONG in Game stores and Sports Direct locations.

Alongside this, Sports Direct has paid £3.2m to acquire a 50% share in the BELONG brand and a 50% share of future profits from this business.

A changing business

Game Digital shares have lost around 75% of their value since the group re-joined the stock exchange in 2014. The group’s core retail business is only marginally profitable.

But value investors — including me — have recently been drawn to the stock’s big cash pile and flexible, short-leased store estate. Net cash reached a seasonal peak of £67m at the end of December, almost matching the current market cap of £70m.

The combination of net cash and minimal lease liabilities has given management the opportunity to shift focus towards esports. Early signs seem encouraging. Revenue from esports and related activities rose by 116% to £13.2m last year. Although losses rose to £6m due to investment, the company says that results have been good enough to support further investment. Sports Direct appears to share this view.

Buy, sell or hold?

At face value, Sports Direct seems to have acquired its 50% share in BELONG quite cheaply. But this deal will mean that gaming arenas can be rolled out much more quickly than expected. If successful, this could give Game a head start over rivals in a growing market.

I think there’s scope for the group to transform itself into a successful esports business with a profitable retail sideline. I plan to continue holding.

One transformation I won’t buy

FTSE 250 waste recycling group Renewi (LSE: RWI) is another work-in-progress. Formerly known as Shanks Group, the company changed its name last year after an ambitious merger with a Belgian firm.

The main attraction of this deal appears to be economies of scale. Management expects to report €12m of committed savings for the year ending 31 March. A total of €40m of synergies are expected by 2019/20.

Will it work?

Although trading has been strong so far this year, I believe these cost savings are much needed. Looking back at previous years’ financials, this doesn’t seem to be a very profitable business. The group’s underlying operating margin was only 4.6% last year, while underlying return on capital employed was only 2.8%.

Another area of concern is debt. Adjusted net debt was £435.9m at the end of September. This represents more than nine times next year’s forecast net profit, which seems uncomfortably high to me.

Renewi shares trade on a 2018/19 forecast P/E of 15. I don’t think that’s cheap enough to be attractive. This is one corporate transformation I’ll be avoiding for now.

The post Should I buy more of Game Digital plc, up 10% today? appeared first on The Twelfth Magpie.

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Roland Head owns shares of Game Digital. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

One such stock I’m personally tipping to thrive in 2018 is Centamin (LSE: CEY), a positive outlook for gold prices and increasing production rates looking likely to get profits moving in the right direction again following recent pressure.

City analysts are also predicting the bottom line over at Game Digital (LSE: GMD) to improve this year, and a bubbly trading update on Thursday has added extra fuel to expectations of an imminent improvement.

Sales rise

The games colossus announced today that gross transaction values (or total sales before the deduction of revenue deferrals related to loyalty points) rose 3.8% during the 23 weeks to January 6. And things were even better during the peak festive period spanning November 1 to January 6, Game Digital reporting that GTVs soared 5.2% compared to a year earlier.

Chief executive Martyn Gibbs attributed the solid performance to “our ability to capitalise on the strong customer demand for Nintendo Switch, the continued adoption of PlayStation hardware and VR sales, the launch of Microsoft’s Xbox One X and a more appealing line-up of new software titles compared to the same time last year.”

In other news Game Digital advised that its cost-stripping programme continued to make inroads, the business making further savings in Britain ahead of its previously-estimated full year savings of around £4m.  And it added: “Further cost saving initiatives [are] under way to offset the margin impact of the sales mix change in the UK Retail business.” Margins ducked in the 23-week period thanks to growing sales of lower-margin hardware like Nintendo’s Switch console.

Still too risky

However, I am less than convinced by the company’s ability to stage a sustained sales rebound as the structural shift in the video games industry from traditional retailers like Game Digital to online platforms steadily heats up.

This attack culminated in Game Digital finally slipping into the red last year (it chalked up losses per share of 3.8p per share in the 12 months ending July 2017).

Although City analysts are predicting the fruits of its recovery plan to help losses narrow to 1.2p in fiscal 2018. In my opinion, deteriorating consumer confidence and the aforementioned impact of digital gaming suggest that Game Digital may find it a struggle to turn around its battered bottom line.

Glistening giant

Given the choice, I would be far happier to stash the cash in Centamin as the scope for extended geopolitical turmoil in 2018 and later, added to rising chatter that stock markets are looking a tad overcooked, looks likely keeps precious metals well bought.

Indeed, latest data from the World Gold Council this week again showed how the store-of-value assets remain popular in the current climate, with global gold ETF holdings jumping 8.4% during 2017.

With Centamin also lighting a fire under production rates, City analysts are expecting the mining giant to bounce from a predicted 46% earnings fall in 2017 with a 14% advance in the following period.  And I for one am expecting profits to continue booming long into the future, thus making the business an attractive selection despite its slightly-heavy forward P/E ratio of 16.9 times.

The post One turnaround stock I’d buy and one I’d sell in 2018 appeared first on The Twelfth Magpie.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The business was salvaged by private equity and refloated at 200p a share in the summer of 2014. The shares climbed to 348p before collapsing 30% when a bad Christmas that year produced a profit warning in January. Christmas 2015 was even worse, with a profit warning coming the day before Christmas Eve, sending the shares crashing 38% to 128p. Finally, trading last festive season wasn’t particularly good but by then shares had declined to sub-60p.

Game made a loss for its financial year ended July 2017 and analysts are forecasting another loss for the current financial year, despite the arrival of the Xbox One X console in November and a stronger slate of new titles than last year. The shares are still trading at sub-60p and the balance sheet boasts net cash, but this is a stock I’m continuing to avoid.

Toddling nowhere fast

At 70p, shares of Mothercare (LSE: MTC) are at around the same level today as at the dawn of the century. They’ve traded a good deal higher at times during the intervening period, but the company keeps heading back to square one as it tries to find a strategy for sustainable growth in a changing retail market.

Its shares tumbled over 18% last month when it reported it had swung to a loss in the 28 weeks to 7 October. It advised that international markets were challenging during the period and continue to be so. Furthermore, towards the end of the reporting period, and in subsequent weeks, it’s seen a softening in the UK market with lower footfall and spend.

More positively, management said: “We are on track with our transformation plans … We continue to invest and make progress, developing the Mothercare brand into a digitally led, global specialist.” Is the company on the cusp of a new era of sustainable growth and shareholder returns? I can only say I’ll believe it when I see it. As trading currently stands, and with net debt also having more than doubled over the last 12 months, Mothercare is firmly on my list of stocks to avoid.

Christmas trading could be telling

Like the baby and parenting specialist, department stores group Debenhams (LSE: DEB) is also struggling to adapt to changing shopping habits. In its results for its financial year ended 2 September, the company reported a 17% decline in underlying profit before tax to £95m, while the statutory number was 44% down at £59m.

The company said: “We have made good progress in setting the foundations for our new strategy, Debenhams Redesigned.” The costs of this (£36m) were responsible for the large fall in statutory profit and the company has said there will be further transformation costs (£20m) in the current financial year. It said it also expects net debt to rise to between £280m and £300m from the last reported £276m.

I’m a long way from being convinced by Debenhams’ transformation strategy and Christmas trading could be telling. I’m avoiding the stock, as it continues to look dangerously overvalued to me.

The post 3 stocks that could be crushed by Christmas appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Defensive income appeal

While the current Bull Run being experienced by the main index could continue over the medium term, inevitably a bear market will come into being. This could mean that it is prudent for investors to hold a mix of defensive shares and cyclical stocks, since the performance of the stock market can change quickly. With National Grid having a defensive business model which lacks high correlation to the performance of the wider economy, it could hold substantial appeal in the long run.

Furthermore, National Grid also has significant income potential. As mentioned, its share price has fallen by 15% this year and this means it now has a dividend yield of 5.1% from a shareholder payout which is covered 1.3 times by profit. This suggests that it could offer a real yield even if inflation continues to move higher. Furthermore, there is scope for dividend growth which is in line with inflation, since there appears to be substantial headroom when the company makes its dividend payments.

Clearly, the utility sector faces a degree of political risk. Domestic energy suppliers could see action regarding price caps. Since National Grid avoids this potential problem due to its focus being on electricity transmission rather than supply, it may offer relatively high share price growth over the medium term.

A stock to avoid?

While National Grid appears to offer a sound mix of defensive and income prospects, gaming retailer Game Digital (LSE: GMD) could be a stock to avoid. It reported full-year results on Wednesday which showed it continues to face an uncertain outlook even though there has been a pickup in demand following the release of various games consoles.

Although trading in the first 15 weeks of the current year has been ahead of group plans, a difficult consumer outlook means that its financial performance could suffer over the medium term. Falling real disposable incomes could cause non-essential items such as games consoles to record lower sales in future, which would hurt the company’s financial performance.

While Game Digital seems to have a sound strategy to reduce costs and maintain market-leading positions in its key markets, it looks set to face trading headwinds. It is forecast to remain a lossmaking entity in the current financial year and this could cause investor sentiment to decline in the coming months. With many retailers offering low valuations and growing profitability over the same time period, there may be superior risk/reward opportunities on offer at the present time.

The post Why National Grid plc is a dividend bargain I’d buy and hold for 25 years appeared first on The Twelfth Magpie.

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Peter Stephens owns shares in National Grid. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Printing profits

Commercial inkjet printing specialist Xaar (LSE: XAR) made its name with digital technology for printing designs on ceramic tiles. But this former growth business has now matured and the group is trying to diversify into areas such as 3D printing.

Today’s half-year results have pushed the shares up by 3%, suggesting to me that investors are cautiously optimistic about the firm’s progress. Product revenue excluding ceramics rose by 60%, confirming that the group’s diversification strategy is working.

However, revenue from the group’s ceramics business fell by 25%, offsetting much of the growth elsewhere. The company says that almost all production capacity has already been converted to digital technology of the kind provided by Xaar. So future sales will be largely limited to product replacement.

Overall revenue for the period was broadly unchanged from the first half of last year, at £44m. Adjusted pre-tax profit fell from £8.8m to £7.9m, while net cash dropped from £49.3m at the end of 2016 to £38.3m at the end of June.

The group expects to report “continued new product growth” during the second half of the year. Current forecasts put the stock on a forecast P/E of 28 for 2017, with a prospective yield of 2.9%.

This looks expensive, but broker forecasts also suggest that profits may rise by 38% in 2018, as sales take off. If these projections are correct, Xaar could enjoy several years of strong momentum, justifying a higher share price.

On balance, I’d give this stock a cautious ‘buy’ rating.

This year’s biggest surprise?

When Sports Direct International bought a 26% stake in video games retailer Game Digital (LSE: GMD) in July, it kick-started a surge of demand for the firm’s shares. Further gains were seen after a strong trading update in August, and the shares are now worth 40% more than they were one month ago.

The group expects to report net cash of £47m for the year-ending 30 July. Based on the current market cap of £63m, this means the market is valuing Game’s retail business at just £16m.

One reason for this is probably that this business is only marginally profitable. Although sales are expected to have risen to £780m last year, analysts are forecasting a net profit for the year of just £6.1m. I’d normally be cautious about getting involved in a situation like this, but I believe the company has some advantages.

The first is that the store portfolio is all on very short leases. Management should be able to take advantage of falling high street rents to cut costs.

Game is also making good progress in the fast-growing ‘e-sports’ live gaming market. Revenue from events and e-sports rose from £4.8m to £7.1m last year, and the group is prioritising further development of this area.

Finally, in 2014 and 2015, the company generated an operation margin of about 3%. If management can return performance to this level, then I believe the shares would look very cheap indeed at under 40p. I continue to rate the shares as a special situation ‘buy’.

The post These recovering growth stocks could help you achieve financial independence appeared first on The Twelfth Magpie.

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Roland Head owns shares of Game Digital. The Motley Fool UK has recommended Sports Direct International. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

At the time, the data security firm which specialises in data erasure and computer reuse, said a number of factors (including the slippage of some big contracts) had put pressure on its cash position — net debt was revised to £5.5m, and the company reckoned it needed £4m “over the coming weeks” to prop up its working capital. A placing which raised approximately £9.45m was the result.

Then on Thursday we had another trading update, revealing a further hole in Blancco’s finances. That led to a 20% crash, and as I write the shares are at 118.5p.

This time we hear that “cash flow and net cash are below market expectations due to the non-payment of £3.5m of receivables, the majority undertaken in the prior year“. That’s led to a charge of £2.2m.

An awakening

The company has apparently had a bit of a lightbulb moment, speaking of “the group’s intention to apply a more prudent approach to revenue and income recognition on this type of contract in the future“.

So, wait a minute… it’s not until the fan gets heavily soiled that a company with prior cash flow problems realises that being prudent when recognising revenue might actually be a good idea?

At this stage I was going to look at Blancco’s fundamentals, but that would be pointless right now when I’m shocked by its apparent inability to see cash flow problems promptly.

A company that suddenly realises it needs urgent cash within weeks to keep going, and still does’t recognise the inadequacy of its income recognition policy until several months later… well, that’s not a company to which I would trust a penny of my investment cash, whatever the ratios say.

Losing the game?

Today’s antics from Blancco reminded me of that other spectacular recent fall, Game Digital (LSE: GMD). Game’s shares had been sliding for months when a trading update on 30 June sent them over a cliff — a 67% crash over the past 12 months to today’s 19.5p. 

Game’s fundamentals actually look decent, with forecasts suggesting a P/E as low as 6.6 for the year ending July 2017 — although that’s a year in which earnings per share are expected to plummet by 80%. The forecast dividend of 1.3p would provide a yield of 6.2%, but in the light of its slashing from 14.7p to 3.4p in in 2016, it’s not something I’m going to put much faith in. 

Even a mooted 55% EPS recovery in 2018 does not attract me to the shares, and I’ll tell you why.

Dying business

The problem I see is that the retailing of binary digits through actual bricks and mortar stores looks to be an increasingly bad idea — the same way online distribution of music has killed many a retailer of CDs (or “record shops” as I still like to think of them).

My ISP has just upped my broadband to a nominal 150Mbps (and unlike many, it actually works out better than that — testing it showed 164Mbps). Why would I want to go all the way to a shop to buy a physical plastic thing when I can have massive digital content downloaded in minutes?

These two shares are beyond the end of my bargepole.

The post Is Blancco Technology Group plc a falling knife to catch after dropping 20% today? appeared first on The Twelfth Magpie.

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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. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A difficult trading environment

As highlighted in the company’s half-year results in March, the challenging trading environment in the UK continues to make life difficult for retailers. However, Game Digital had been upbeat about its prospects in the second half of the year. This was based on the release of the latest console from Nintendo. This was expected to cause a spike in sales and while that has happened, the extent of the increase in sales has been lower than anticipated due to lower than forecast supply of the console.

Although the company continues to anticipate positive gross transaction value growth in the second half of the year of approximately 5%-6%, this is down on its previous expectations. This is also partly due to a soft overall video games market, with consumer spending on discretionary items likely to come under further pressure. The main reason for this is higher inflation which is now ahead of wage growth. This means consumers have less disposable income in real terms to spend on items such as consoles and video games.

Outlook

The prospects for retailers such as Game Digital and Games Workshop (LSE: GAW) appear to be rather bleak. The outlook for consumer spending remains tough and, realistically, things could get worse before they get better. Political risk remains high, and this could hurt business confidence and create a prolonged period of economic gloom. This may lead to profit warnings across the retail sector such as that experienced by Game Digital on Friday.

In terms of the future prospects for the firm, it seems to be dependent upon the supply levels of the latest Nintendo console. While it is optimistic about this, there is no guarantee that supply levels will improve. Therefore, it may be prudent for investors to await further updates before buying a slice of the business, given its uncertain outlook.

In the case of Games Workshop, it is forecast to deliver a fall in earnings of 11% this year. This is due to be followed with growth of 3% next year. Given that it trades on a price-to-earnings (P/E) ratio of 14.6, it seems to lack a sufficiently wide margin of safety to warrant investment at the present time. While the company may have a sound strategy and strong business model, external factors could count against it and lead to relatively disappointing share price performance.

The post Is Game Digital plc a falling knife to catch after dropping 30% today? appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Game over

In November 2014, the shares of Game Digital (LSE: GMD) hit 338p. Fast forward to today and those very same shares have fallen 90%. Just why anyone would consider investing in the high street video game retailer in 2017 is beyond me.

Recent results tell you everything you need to know. In March, the £59m cap announced a 9.1% dip in revenue to £499m over the 26 weeks to the end of January compared to the same period in 2016. Pre-tax profits dived almost 27% to £16.5m and net cash from operating activities fell 61% to £25.7m.

With the popularity of online gaming making traditional consoles look increasingly outdated, I believe Game — which struggles to compete on price with online behemoths such as Amazon anyway — is a company in terminal decline. 

Aside from my concerns about where exactly it hopes to find and retain new customers, a quick look into Game’s financials is more than enough to put me off the company. Operating margins and returns on capital have fallen dramatically in recent years. Free cashflow? Don’t even go there.

Shares may be trading on just 11 times earnings (assuming EPS growth of 1.6% for the current financial year) but Game is one business that — in my opinion — is very unlikely to recover.

Posh flop?

Holders of Laura Ashley (LSE: ALY) surely deserve a bit of sympathy. The shares were trading around 24p this time last year. Today, you can pick them up for just over 10p – making it the sixth worst performing small-cap on the main market.

A quick recap of February’s interim results for the six-month period to the end of December and this kind of performance should come as little surprise. Back then, the company revealed a 3.5% drop in total like-for-like retail sales with pre-tax profits slumping 28% to £7.8m. At a time when any retailer worth its salt is growing digital sales at a furious rate, it’s interesting to note that online revenue remained almost flat at £25.6m (an increase of just £600,000 on the same period in 2016).

Looking forward, the Newtown-based business is expected to post a 52% drop in earnings per share for this financial year. Dividends are unlikely to be covered by profits and I wouldn’t be surprised if the company’s balance sheet — which once boasted a net cash position — becomes even more fragile. Returns on capital, which used to be so high, are falling rapidly. Free cashflow has dropped off a cliff and, thanks to its significant store estate requiring regular investment, I can’t see this recovering anytime soon.

As inflation rises and consumer belts tighten, Laura Ashley looks more vulnerable than ever. On eight times earnings, this presents as nothing more than a value trap.

Bottom line

When it comes to investing, buying cheap doesn’t always work out well, particularly in the ultra-competitive retail sector. For every company that manages to turn things around, you’ve got several more continuing to struggle or falling into oblivion. As far as I can tell, both Game Digital and Laura Ashley are prime examples of the latter.

The post 2 dangerous value traps I’d sell immediately appeared first on The Twelfth Magpie.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.