A dive FTSE 100 Buying shares at a relatively low price in my investment portfolio can be a great opportunity. But sometimes dives can also be a red flag, especially when broader markets are doing well. So I think it’s instructive to dive into the special story of the stock to understand what’s really happening and what my next step should be.
Pearson came down in the trading update
This is the case with learning companies Pearson (LSE: PSON). The share price has dropped 13% so far in today’s trading since the release of the trading update. The company showed a 10% increase in underlying revenue for the nine months ended September 30 compared to the previous year. By itself, it doesn’t feel too bad to have a growth rate. However, it is slower growth than the 17% seen in the first half of the year. This probably explains the investors’ frustration with the results.
The FTSE 100 stock side is upward
But the reality is, Pearson’s revenue has been declining for several years now. Between 2016 and 2020, they declined by about 25%. So I’m not particularly discouraged by the slowdown in recent growth. In fact, it is a good sign that its income is actually increasing at all. It has also reported a decline in net debt, which I think is a positive for all companies, especially when the global economy is still at risk.
I also like that the biggest revenue generating parts of it have seen strong growth. Its ‘assessment and qualifications’ segment, which accounts for about 35% of its total revenue, has been able to maintain healthy growth despite a slight softening in the last quarter. Its growth is 24% for nine months until September.
Positive change for safe stock
The company is also in the process of rediscovering itself for the digital world, moving away from relying on traditional themed education-related publications through the Pearson + app. Since its launch in July, it has registered 2 million users, which is encouraging. It remains to be seen whether the company will succeed with this change of track, but it seems to be a step in the positive direction.
It is a stock for risk prevention. If there is a recession in the future, demand for educational products and services is likely to be affected in a limited way. So buying Pearson stock can be a great way to diversify my portfolio. Also, it pays a dividend. Its yield is not more than 2.7%, but I don’t think anything of the extra cash.
I think its earnings (P / E) ratio is about 20 times higher than its value. The average P / E for the FTSE 100 index is about 15 times, so it is definitely significantly above that. There are a few more stocks that have the same or lower earnings ratio but have performed quite well, at least in the recent past, with miners, and unnecessary retailers. To that extent, I think its appeal has diminished.
What would I do
Although everything has been considered, I will wait for its detailed results before taking a call on whether to buy the stock, do not dive.
Manika Premsingh has no position in any of the shares mentioned. Motley Flower UK has recommended Pearson. The opinions expressed in the companies mentioned in this article may differ from those of the authors and therefore the official recommendations we make on our subscription services such as Share Advisors, Hidden Winners and Pro. Here at The Motley Flower we believe that considering a variety of insights makes us a better investor.