Investment analysts often use a technique known as mosaic theory to predict how a company’s performance might change in the future. By combining many small pieces of information, they form a view on what might happen next.
How’s this relevant to us? Well, big utility stocks have been seriously out of favour over the last few years. The SSE (LSE: SSE) share price has fallen by 27% over the last two years ,and the group has been forced to schedule a dividend cut for 2019/20 — something it’s never done before.
Bearish investors have put forward a whole list of reasons why things may continue to get worse. I’m not so sure. Mosaic theory suggests to me that the outlook may soon start to improve.
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The market is changing
Customer numbers fell by 6% at SSE last year, as many opted for cheaper fixed-rate deals from smaller energy suppliers. Unfortunately, some of these cheap deals are turning out to be unsustainable.
Eight small energy suppliers went bust last year. On Wednesday, a ninth, Economy Energy, failed, leaving a further 235,000 customers in need of a new energy supplier.
Although the government’s new price cap is expected to have a moderate impact on big suppliers like SSE, it’s also said to be hurting small suppliers, who lack the financial muscle of the big players.
Overall, it’s starting to look like many cheap deals from small suppliers were too good to last. I think larger firms will enjoy a more level playing field over the next few years.
The bad news is in the price
Billionaire investor Warren Buffett has often noted that investors should be greedy when others are fearful. I think this could be one of those times. SSE has had a lot of bad press over the last year, but this information is already known and reflected in the share price.
Looking ahead, I think there’s a good chance the group’s performance will gradually recover. As the UK’s largest renewable supplier, SSE could be well positioned for the future.
With the group’s shares trading on 11 times 2019/20 earnings, and offering a dividend yield of 7.3% (after the dividend cut), I think SSE looks like a good buy for a long-term income.
This could be one to avoid
One the other hand, problems at cycle and motoring retailer Halfords Group (LSE: HFD) still seem to be getting worse.
The Halfords share price was down by 20% at the time of writing on Thursday, after the company issued a profit warning. Underlying pre-tax profit is now expected to fall by about 15%, to between £58m and £62m. Previous guidance was for this figure to be unchanged from last year, at about £72m.
The company blames November’s warm weather for a fall in sales of weather-related motoring products. But sales of more expensive adult cycles also fell slightly over the Christmas period. You can’t blame mild weather for that.
My verdict
Halfords isn’t without attractions. Debt is low and the firm’s cash generation has historically been very good. The shares yield 8% after today’s fall, and management made a fresh commitment to maintain the dividend in September. A cut seems unlikely, unless things get much worse.
However, today’s news is a disappointment. I’d be tempted to wait until the picture improves before considering whether to invest.
