Investing in dirt-cheap UK shares is hugely tempting. If you buy ahead of the recovery, you could make a fortune when they swing back into favour. The following two FTSE 250 stocks are both trading at bargain valuations, after plunging out of the FTSE 100. I’d approach with caution though.
Plenty of bargain seekers have piled into Royal Mail (LSE: RMG) and Marks & Spencer Group (LSE: MKS) in recent years, but most will have been disappointed by the results. These two household name UK shares are proving hard to turn around.
Marks & Spencer has lost a retail empire, and is still trying to find a role. The group seems to have been restructuring for most of my writing life. Its food division has enjoyed success, but its clothing operations have spent the last two decades missing the zeitgeist, with unerring accuracy.
I’d avoid this troubled UK share
Management has responded to its most recent reversals by tinkering with structures to reduce role duplication, improve accountability and allow retail teams to focus more on the customer, etc etc. All of which is fine (unless you’re one of latest 950 set to lose their jobs), but falls well short of the dramatic turnaround required.
Talk of making Marks & Spencer stronger, leaner and resilient doesn’t excite me. It sounds like planning for failure. I want it to give shoppers a reason to step back into its stores, in the hope of enjoying the experience, and emerging with something stylish to wear.
The shift to online shopping and the pandemic haven’t helped. But the truth is the rot set in before those two menaces emerged. The latest turnaround plan ‘Never The Same Again’ is one of many. They come along as regularly as new chief executives. M&S may be a dirt-cheap UK share, trading at around 6.5 times earnings, but I think its glory days are gone. All empires fall in the end.
Royal Mail is another UK share with an end-of-empire feel, as it looks to survive the death of the letter. Like Marks, it also has more fertile ground to explore, in the rise of e-commerce. The lockdown has worked in its favour here. Parcel volumes rose 38% in the three months to 28 June, as businesses and consumers shifted online.
This FTSE stock is dirt-cheap for a reason
Against that, you have to set the long-term decline of the group’s UK parcels, international and letters unit. Sadly, the lockdown failed to revive the lost art of letter writing.
By contrast to Marks, the Royal Mail share price is actually climbing, up 10% in three months. However, that may largely be down to investors speculating on the intentions of Czech billionaire Daniel Kretinsky, who is upping his stake in the business.
Royal Mail may be trading at just 9.5 times earnings but, like Marks, it seems to lack edge in a competitive world. I’d rather target UK shares with a bright future, rather than a glorious past.
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Harvey Jones 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.
Motley Fool UK 2020