Ocado (LSE: OCDO) is up more than 15% since mid-December, when I wrote it could deliver plenty of value to shareholders. Reckitt (LSE: RB) has also fared pretty well in recent weeks, while National Grid (LSE: NG) has been a disappointment. Meanwhile, International Consolidated Airlines (LSE: IAG) is flying high in the wake of merger talks with Aer Lingus.
Here’s why you may want to hold onto all four companies if you are invested — and why you may also be tempted to cash in now.
Ocado: I Wouldn’t Sell
What to Like: Ocado will continue to grow, and as it grows, it will likely become more profitable and it will also enlarge its base of suppliers and clients. Managers have beaten consensus estimates in recent times, and I believe they may continue to surprise analysts over the medium term. Recents trends are encouraging.
What To Dislike: Its stock trades above 2x sales and 25x adjusted operating cash flow, on a forward basis, which are rich trading multiples for any business. If planned heavy investment doesn’t help Ocado grow revenue by about 50% in the next couple of years, it could be a roller-coaster ride for shareholders in 2016.
Reckitt: I’d Reduce Exposure
What to Like: Reckitt is a solid business, which, according to Neil Woodford, was too expensive in October 2014. A highly profitable company, it boasts strong operating margins and cash flows. Its asset base leaves plenty of room for improvement, and as I said in October when Mr Woodford exited the investment, when it comes to trading multiples for cash flows, Reckitt doesn’t strike me as being a particularly expensive equity investment.
What To Dislike: The stock has recorded a +10% performance, having outperformed the FTSE 100 by only two percentage points in the last 14 weeks of trading.
National Grid: I’d Keep It For A Little While
What to Like: The performance of National Gird has been truly disappointing in recent weeks. While the shares should trade above £10, in the light of decent fundamentals and a relatively convenient valuation, I have become less attracted to the utility sector. Of course, National Grid remains the best pick in the space, but regulatory hurdles are apparent.
What To Dislike: The shares have been looking for direction for some time, and it looks like they’ll struggle to trade outside the £9.20-£10.20 range for most of this year.
IAG: M&A Hightens Risk/Reward Profile, Take Profit
What to Like: IAG has done incredibly well in recent times and that is reflected in its stock price, which is not too high, based on fundamentals and trading multiples. It emerged on Tuesday that the board of Aer Lingus had recommended an improved offer of about £1bn from IAG, so now IAG must win approval from the Irish government. Strategy-wise, management is doing a great job.
What to Dislike: Based on its relative valuation, IAG stock is not expensive, in my view, but after a rally (+40%) in the last three months, any bad news related to the outcome of the Are Lingus deal could contribute to value destruction in weeks ahead.
