On the surface, Betfair(LSE: BET) and RPC Group(LSE: RPC) have nothing in common. ButBetfair has delivered a very strong performance in recent weeks (+34% yearto date), whileRPC Grouphas fared well since the end of November (+12%), and is very likely to test its record highs very soon.
You may be tempted to cash in now, of course.If so, think twice before investing inSantander (LSE: BNC), whose shares trade in negativeterritory this year (-8%). Elsewhere, Diageo(LSE: DGE) (+5% year to date) remains a solid yield play, although its shares may struggle to rally for some time.
Betfair is proving to be more resilient than I thought. Managementis doing something right with regards to its strategy,as I recently argued, and it seems likea more solid investment than Paddy Power, whoseshares havealso appreciated fast in recent times but are less likely to keep up with a stellar performance to the end of the year, in my view. Elsewhere,Ladbrokes andother players in the sector are less appealing due to the risk they carry. Betfair is not very cheap, based on its relative valuation, but its strong balance sheet and hefty operating margins are elements to like. Personally, Id retain exposure to the stock as part of a diversified portfolio.
Following its acquisitionof IcelandsPromens Group, RPC Group will likely continue to bank on cost synergies in the next few quarters, and it may find it easier to surprise investors and analysts. This plastic packaging supplierhas delivered plenty of growth for many years, and it lookslikely continue to do so into 2016. It doesnt seemlike its shares are particularly expensive, given that they trade at a price-to-earnings ratio of19x and 14x for 2015 and 2016, respectively. Cash flow multiples also point to possible upside. RPCsforward yield is close to 3%, and its balance sheet is efficient, with net leverage at around 2x. Shareholder-friendly activity is a possibility, and supports the investment case at a time when the shares trade some 20% below the average price target from brokers.
Banco Santander & Diageo
Santander is a restructuring play that will take time to deliver value, in my view.The bank slashed the dividend by two-thirds in early January, when it also announced a7.5bn reparatory rights issue. Based on most trading metrics the shares are still expensive, and I think analysts are way too bullish with regard to net income growth in the next three years.
Moreover, there may be other problems around the corner: the quantitative results from the Dodd-Frank stress tests one component of the Federal Reserves analysis during the Comprehensive Capital Analysis and Review (CCAR) will be released on 11 March. According toThe Wall Street Journal,the US subsidiaries of Deutsche Bankand Banco Santandermay fail over shortcomings in how potential losses and risks are measured. Well soon find out how this one goes
Its main attraction is a dividend yield at about 3%, and that says it all really. The stockhas failed to deliver capital gains for a couple of years now: it remains a mildly risky bet on the recovery in emerging markets. Based on trading multiples, the shares are a bit expensive, although Diageos fundamentals are strong. The problem as with many other competitors in the booze industry is that growth is hard to achieve, and declining returns on capital are very possible if growth prospects remain muted.
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