Is WM Morrison Supermarkets plc Set To Recover Quicker Than Unilever plc, HSBC Holdings plc & Petrofac Limited?

WM Morrison Supermarkets plc (LON:MRW) offer greater upside potential than Unilever plc (LON:ULVR), Petrofac (LON:PFC) and HSBC Holdings plc (LON:HSBA), argues this Fool.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If I had to choose two cyclical equity investments trading at depressed valuations, HSBC (LSE: HSBA) and Petrofac (LSE: PFC) would be my preferred choices. And if I decided to be slightly less aggressive, I’d then pick up Unilever (LSE: ULVR) — at these prices, the consumer goods company looks really tempting. 

Morrisons (LSE: MRW), however, could be the biggest bargain. Namely because with HSBC, Petrofac and Unilever, you have to embrace emerging market risk — the biggest threat to value in this environment. 

Changing Times 

Investors have been looking for the bottom in the food retail sector for about five years now, and there’s a good chance that we may be there right now. If that’s not enough to join the Morrisons family, consider that at 150p a share you’d be buying the stock of the same company that, based on very similar fundamentals, traded 40% higher at 210p back in March.

Not much has happened since, really, aside from a more enticing trading multiple of 6 times its adjusted operating cash flow at present! A decline in its market share — down from 10.9% to 10.7%, according to data from Kantar Worldpanel this week — doesn’t justify its lowly valuation based on its net worth. Investors do not trust the sector any more, but as with everything else in finance, there’ll come a day when today’s threat will be perceived to be a missed opportunity — and consolidation could be around the corner. 

Correction 

A correction in asset prices was long overdue, but if we focus on fundamentals then Unilever is by far one of the safest staples in the market. Currently trading at 2,595p, its stock has fallen only 17% from its 52-week high, but I maintain my personal price target of 3,400p into 2016. Most analysts believe that Unilever’s fair value should hover around 2,950p, but its fundamentals and trading metrics suggest that upside could be greater. In fairness, it has not been a fantastic year for shareholders, but you’d have not lost a penny if you had invested in it on 2 January. 

Yield at 5.4% = 20% Capital Gain

At 500p a share, HSBC is the most obvious banking play right now, and that is because its asset base isn’t as bad as many fear, while corporate governance offers more reassurance than at its chief rival, Standard Chartered. As you might now, I am not a big fan of banks at this point in the business cycle, but a multitude of factors — attractive trading multiples based on book values and easy access to external capital, among others — point to only one possible recommendation, and that’s a strong buy in my view. A drop in its forward yield from 6.6% to a lower level of 5.4% spurred by a stock rally — under the assumption of constant dividends — would imply a 20% pre-tax capital gain for you.

Discount To Fair Value

Petrofac has been more volatile than I thought in recent days and weeks, but I have not lost faith. Its shares currently change hands at 770p, yet most of its core financial metrics indicate a fair value per share in the region of at least 950p. There are obvious risks with Petrofac; in spite of broader market volatility, however, its market cap has risen 8.5% this year, while its share price is closer to the lows that it recorded following a profit warning in 2014 than to the 52-week high of 1,203 that it hit this year before investors panicked! Also remember that management expects a stronger second half, which could bring some very nice surprises…

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK owns and has recommended Petrofac and Unilever. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

The Anglo American share price soars to £25, but I’m not selling!

On Thursday, the Anglo American share price soared after mega-miner BHP Group made an unsolicited bid for it. But I…

Read more »

Investing Articles

Now 70p, is £1 the next stop for the Vodafone share price?

The Vodafone share price is back to 70p, but it's a long way short of the 97p it hit in…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

If I’d put £5,000 in Nvidia stock at the start of 2024, here’s what I’d have now

Nvidia stock was a massive winner in 2023 as the AI chipmaker’s profits surged across the year. How has it…

Read more »

Light bulb with growing tree.
Investing Articles

3 top investment trusts that ‘green’ up my Stocks and Shares ISA

I’ll be buying more of these investment trusts for my Stocks and Shares ISA given the sustainable and stable returns…

Read more »

Investing Articles

8.6% or 7.2%? Does the Legal & General or Aviva dividend look better?

The Aviva dividend tempts our writer. But so does the payout from Legal & General. Here he explains why he'd…

Read more »

a couple embrace in front of their new home
Investing Articles

Are Persimmon shares a bargain hiding in plain sight?

Persimmon shares have struggled in 2024, so far. But today's trading update suggests sentiment in the housing market's already improving.

Read more »

Market Movers

Here’s why the Unilever share price is soaring after Q1 earnings

Stephen Wright isn’t surprised to see the Unilever share price rising as the company’s Q1 results show it’s executing on…

Read more »

Investing Articles

Barclays’ share price jumps 5% on Q1 news. Will it soon be too late to buy?

The Barclays share price has been having a great time this year, as a solid Q1 gives it another boost.…

Read more »