The 12 Worst Blue Chips of 2012

LONDON -- It's been a good year for the FTSE 100. So far in 2012, the index is up 7%. But if you had started the year with some of these shares in your portfolio, your returns may have fallen short.

Lists of laggards are one of my favorite places to start looking for new investments. So I've trawled the FTSE 100 to find the 12 companies whose shares have underperformed the index by the largest margin.

Though these shares have disappointed during 2012, could they recover in 2013?

Company

Price (pence)

Performance (1-year)

P/E (forecast)

Yield (forecast)

Market Cap (millions of pounds)

Eurasian Natural Resources

275

(61.1%)

8.3

2.4%

3,540

EVRAZ

272

(35.1%)

46.0

1.9%

3,682

BG (LSE: BG  )

1,031

(30.1%)

12.3

1.6%

35,207

Anglo American

1,895

(27.8%)

14.4

2.4%

26,596

WM Morrison Supermarkets (LSE: MRW  )

265

(24.7%)

9.9

4.4%

6,409

Tesco (LSE: TSCO  )

342

(20.2%)

10.6

4.3%

27,465

Kazakhmys

777

(20%)

9.5

1.5%

4,069

Pennon

636

(19.4%)

14.7

4.5%

2,319

Vodafone (LSE: VOD  )

156

(19%)

10.0

6.3%

76,722

Tullow Oil (LSE: TLW  )

1,220

(19%)

23.7

0.9%

11,124

Glencore International

352

(18.8%)

11.0

2.4%

25,026

Shire

1,924

(18.5%)

15.4

0.6%

10,845

Data from Stockopedia.

Five shares stood out in particular.

1. Tesco
Tesco shocked the market at the start of the year with a profit warning, which saw the shares fall almost 25% in just two weeks. Most worryingly, the warning was not caused by one-off factors, but by Tesco's failure to compete effectively in its core U.K. market.

It turned out that Tesco had not sold enough discounted items over the crucial Christmas period, which frightened investors badly. Just as Tesco's shares have underperformed, it is becoming increasingly clear the company has, too. Industry surveys have shown the supermarket losing market share to Waitrose, J Sainsbury, Aldi and Lidl.

News that Tesco is reviewing its U.S. operations has given investors some cheer. The possibility that Tesco might dispose of the underperforming Fresh & Easy stores could make Tesco more profitable in the future.

2. WM Morrison Supermarkets
Shares in Morrisons have done even worse than Tesco this year. The company is losing customers to the other supermarkets and has no sizable non-food, online, or convenience offering to counter with.

So, with the shares down 18% this year, is it time to take another look at Morrisons?

Morrisons' shares have never been so cheap on a P/E or yield measure. Indeed, Morrisons is one of the very few companies that now trades at a rating lower than that seen during the worst of the financial crisis. Today, the shares trade at just 9.9 times forecast EPS (earnings per share) for 2013. The expected dividend yield is 4.4%.

Better still, analysts are forecasting Morrisons will continue to grow. Consensus expectations are for the dividend to increase another 8.3% next year, with earnings increasing 3.7%.

3. BG
BG is an energy exploration and production company with a focus on gas.

BG shares were doing all right until late October, when a quarterly results statement saw 20% wiped off the value of the shares. That's what happens when a highly rated share disappoints.

BG now trades on a more modest valuation. Based on analyst consensus forecasts, BG is valued at 12.3 times expected 2013 profits, falling to 11.8 times expectations for 2014.

High levels of dividend growth are expected to continue for the next two years. For 2013, a 9.1% payout increase is expected, followed by a further 7.2% rise for 2014.

To me, BG looks a decent play on long-term global demands for gas.

4. Tullow Oil
Tullow Oil has one of the best success rates with drilling of any listed oil explorer. Since the 1990s, Tullow has grown from a small-cap oil company with operations in eight countries to a FTSE 100 firm operating from 22 different countries and earning annual revenues of more than $2 billion.

The shares fell in December following a disappointing drilling result in Ghana. When a single well comes up short, oil investors often reappraise the probability of success of every other planned well. If the prospects of a region are then undermined, an explorer's shares can fall hard.

Tullow's earnings are forecast to remain broadly the same for the next two years. However, the dividend is expected to be increased substantially.

5. Vodafone
You may be surprised to see one of the U.K. market's biggest companies fall so hard this year. Indeed, Vodafone's shares now trade near a two-year low.

During the same time, however, Vodafone has been increasing its shareholder dividend, which has meant a rapidly increasing yield on the shares. Dividend increases are forecast for this year and next, pushing the 2014 yield to an anticipated 6.5%.

While the yield picture looks assured, analysts have recently been trimming their estimates of Vodafone's future profitability. These downgrades are worrying, as brokers are usually optimistic. In the last three months, consensus EPS forecasts for 2013 and 2014 have both fallen by 1 pence.

Vodafone is currently engaged in a 1.5 billion pound share buyback that I expect to provide significant support for the company's share price during 2013.

Ideas for 2013
If you want to build an income using high-yield shares such as Vodafone, then check out what Neil Woodford has been buying.

Woodford is one of the best fund managers of his generation, with his portfolios beating the market by more than 200% during the 15 years to October 2012.

You can learn where Woodford has been investing in this free Motley Fool report "8 Shares Held By Britain's Super Investor." The report is 100% free and will be delivered to your inbox immediately. Simply click here to start learning from this top investor today.

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