Ocado (LSE: OCDO), Premier Foods (LSE: PFD), BG Group (LSE: BG) and Rio Tinto (LSE: RIO) — there is a lot of risk involved in these four stocks, but there are also a few reasons why BG and Rio Tinto may deserve your attention. Read on…
Ocado falls… enough to buy?
Ocado is down 20% in the year to date. This is not an easy stock to value.
At 334p, where it currently trades, I think you should add 1.5% of Ocado to your diversified portfolio, however.
This online delivery company may not seem a very safe investment, but it could deliver nice returns over time. As a gentle reminder, the stock is up 107% over the last two years. Value investors may not be bothered, but I am convinced that its fast-falling valuation offers a decent entry point.
Keep an eye on growth for sales in the next few quarters. The bears have been proved right so far this year, but Ocado is a long-term play and I would wait some time before suggesting that this growth story is over.
Premier Foods rises… enough to sell?
Premier Foods has been on my radar for a very long time, but its shares have never looked cheap enough to deserve attention — and this is one big difference with Ocado.
Similarly to Ocado, though, Premier Foods is not an income stock, and could also be highly volatile.
Its share price has risen 35% in the year to date, but is down 35% over the last twelve months.
Most of the surge in 2015 came in January, when the food producer’s fourth-quarter results did not disappoint investors, and it showed decent market share figures for the quarter.
The stock has lost 80% of value over the last five years, and it could be a roller-coaster ride for shareholders in the second half of 2015. Sales are still falling, margins are thin and its debt load remains problematic.
Certainly, net leverage has significantly improved, but it’s hard to say whether Premier Foods will return to the black on a consistent basis. Trading multiples aren’t very reliable at this point in time.
BG Group & Rio Tinto — have you had enough?
BG is on my wish list, while Rio is my least favourite stock in the mining sector.
How many times have you been told that these two stocks are dirt cheap?
BG is up only 2% this year, having lost 20% of value in the last 12 months. The appointment of Helge Lund from Statoil was good news, but new management must prove it can turn around BG’s fortunes if BG’s share price is to rise at a fast pace, however.
I am a bit concerned about its payout ratio, and shareholders may need assurance on that front. For the time being, BG has decided to slash capital expenditure, but Mr Lund may surprise investors with more action in months to come. Shareholders may welcome a more aggressive strategy with regard to the dividend.
The average price target from brokers is about 23% above BG’s current stock price, which points to downside risk, particularly if management doesn’t deliver.
Mr Lund will find a way to sort out BG’s problems, in my opinion — and, after all, this remains one of the most attractive restructuring stories in the marketplace.
Rio Tinto’s cash flow profile still provides reassurance. Is the dividend really safe, though?
Investors would not welcome a cut in the payout ratio, but that is a risk weighing on Rio stock. Its forward yield is above 5%, and more than double BG’s.
Rio is down 3% this year — based on most trading metrics, it looks fully valued, the bears argue.
All the bad news is now priced into Rio stock, the bulls insist!
Who is right then?
What I know is that management must restore confidence, although there’s nothing they can do to fend off the threat of a very challenging macroeconomic landscape.
“A slide in iron ore prices is turning the screw on China’s fragmented mining sector, paving the way for closures and consolidation with three-quarters of the country’s mining capacity operating at a loss, industry officials said on Friday,” Reuters reported today — bad news for Rio and for BHP Billiton.
Similarly to BG, the average price target from brokers is about 23% above Rio’s share price.
And also like BG, it could be hard times for shareholders, but if you are willing to embrace risk, you would likely do well to add some exposure to both of them right now.
