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Is it wise to buy profit downgraders Telstra & Ramsay Health Care Limited (ASX:RHC)?

The share prices of our biggest telco Telstra Corporation Ltd (ASX: TLS) and our largest listed hospital operator Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) have taken a deep dive on the back of their recent profit downgrades.

This could be tempting bargain hunters to jump in given that these blue-chip stocks have not been this cheap in a very long time.

Their valuation just got more enticing this morning with Telstra falling another 1.8% to $2.67 while Ramsay slumped 2.4% to $56.11 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) has managed to overcome early weakness to trade 0.1% in the black.

But should you take the plunge?

Before I answer that, it’s worth noting that companies which issue bad earnings news tend to stay depressed for months. It’s rare to see a profit “downgrader” bounce back in the short-term.

This point is highlighted by Bell Potter’s stock guru Richard Coppleson, who looked at the 20 worst profit disappointers from the February reporting season. He found that four-in-five of them are still underperforming today with the average total loss for the group of around 16% since they announced the bad news.

I suspect Ramsay will be one of the four and this means there is no rush to buy the stock even though I like its longer-term fundamentals.

If anything, shareholders should sell the stock as I believe you can buy it back at a lower price in the new financial year.

Speaking of which, the end of FY18 is another reason for bargain hunters to wait as Ramsay has become a late tax-loss selling candidate, and I believe short sellers will be increasingly targeting the stock in the near-term.

The headwinds buffeting the hospital operator also aren’t going away anytime soon. Management all but admitted that its two problem markets, the UK and Australia, remain challenged in the foreseeable future.

The upside is its portfolio of brownfield developments in high population growth corridors, but the earnings upside won’t be felt for a while yet and there are no other near-term catalysts for the stock.

Telstra faces similar issues, but unlike Ramsay, I think the telco is worth a punt. This is because management has actually said all the things I wanted to hear when it broke the bad earnings news.

Telstra is making a deeper cuts to costs to generate an extra $1 billion in savings and is preparing itself (so it seems) to divest its infrastructure assets into another entity. It will also sell about $2 billion in assets to shore up its balance sheet.

I was hoping management would also announce a cut to its FY19 dividend so that all the bad news is out in the open, although it practically did by confessing that its earnings before interest, tax, depreciation and amortisation (EBITDA) would be around 15% below consensus.

You can assume its 22 cents a share dividend will be slashed by around 25%-30% in FY19 and this will still put the stock on a yield of over 8% if you included franking.

Buying Telstra is not for the faint-hearted but I suspect the stock will come back into favour in the new financial year. Ramsay could as well, but I would wait till the August reporting season before deciding if the stock has turned a corner.

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Motley Fool contributor Brendon Lau owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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