Before we press on, a caveat: I am working under the assumption that theFTSE 100will rise between 3% and 6% in 2015.
Tesco: Looking For Catalysts
Theres a lot going on at Tesco, whosefull-year results are due on 22 April, when itwill have to show that its accounts are in good order.Should you snap up the shares before then?
Well, its highly unlikely that the UKs largest grocer will disappoint investors in the next couple of quarters, in my view.Management has made good progress in the last few months, with the stock up 47% since its rally started in October.At 244p, Tesco can hardly be defined as a bargain based on the value of its assets, which I estimate to be close to fair value at 237p but it remains an appealingturnaround story.
In April last year, Tesco traded some 50p higher, and by no means did its future look brighter back then.
Its portfolio of assets is being restructured, with rumours suggesting several divestments will be announced in months to come, including a large stake in Tesco Bank, which should be sold only for a top valuation in my opinion. The grocer recently agreed areal-estate swap with British Land, whichwas good news as Tesco now owns the freehold of a larger number of its stores.
In the 12 weeks ending 1 February 2015, the grocery market grew at 1.1% the fastest rate since June 2014, according toKantar Worldpanel andTesco returned to growth for the first time since January 2014, increasing sales by 0.3%.If recent trends are confirmed in the next few quarters, and divestment take place,Tesco could well rise to 300p a share and could also return to a more generous dividend policy earlier than expected
There are risks associated to Glaxo, which reports first-quarter results in early May.
Unless management give investors a few good reasons to back the company, shareholders will probably experience more volatility going forward although one could argue that in less stable market conditions the shares of this pharmaceuticals giant could fare relatively well. I dont buy into such an optimistic view, and I think Glaxo will likely struggle to deliver rising returns to shareholders, particularly in the second half of 2015.
Its stock has recorded a stronger performance than that ofAstraZeneca in recent times, but its much less appealing than Shire over the long term, and it appears to me that it may find it more difficult to outperform the FTSE 100 from this level, unless material news such as the massive spin-out of itsHIV drugs business emerges in due course.
Glaxo is a rather mature business whose shares trade at 20x forward earnings, and although they offer a forward yield above 5%, Id be more interested to bet on a different recovery story in another defensive sector. So, is Diageo the one right now?
Its third-quarter numbers are due on 16 April;I am afraid, but I am not interested in Diageo at this price, and I think upside is very limited from this level, while downside could be up to 12% this year.
Diageo recently announced thatit had agreed to take full control of United National Breweries in South Africa and thats the way forward, but the problem is there arent may assets available on the market, so one obvious question is where growth will come from.
As a mature business with operations worldwide, its valuation is in line with that of Glaxo, based on its earnings multiple, but is 20% higher based on its adjusted operating cash flow multiple, which is a warning sign for a value hunter like me.
Finally, the shares of many of its competitors are more attractively priced.
Of course, Glaxoand Diageo remain safe income investments offering attractive and safe dividends, but if you are after meaningful capital appreciation, I suggest you learn more about three other defensive businesses that are undervalued and are much more likely to reward you with one-year capital gains north of 20%into early 2016.
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