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Naughty Or Nice? What You Need To Know About BG Group PLC, SABMiller PLC & HSBC Holdings plc

Three different businesses, three different sectors, three different risk profiles: BG Group (LSE: BG), SABMiller (LSE: SAB) and HSBC (LSE: HSBA).

Are they cheap enough to deserve your attention? And if so, which one should you choose? 

BG has bounced back this last week (+5.9%) but its valuation still offers plenty of upside, I’d argue. It’s one of my top picks in the sector. This is a long-term investment, in my view.

SABMiller, meanwhile, wasn’t trading far away from its unaffected share price of £31 until a couple of days ago, and although it has risen a lot since last Monday, I’d keep it on the radar. SABMiller is a trade for opportunistic investors, I feel. 

HSBC, for its part, is attractive enough to be considered the safest bet in the UK banking universe. I don’t like the sector, but HSBC shares could offer meaningful upside if management get their strategy right. 

Is BG Worth 1,110p?

Quite simply, the oil and gas sector is a contrarian bet right now. Based on several trading metrics, BG stock’s fair value should stand at 1,110p, in my view — for an implied upside of 26% from its current level. The are several reasons why BG could outperform utilities and integrated oil producers in the next couple of years. Among other things, its restructuring will likely speed up under new management.

The new CEO, Helge Lund, will start in early March. Mr Lund has an impressive track record, and his remuneration package is tied to total shareholder returns, cash flow metrics and capital efficiency measures, as well as BG’s long-term performance. The initial remuneration package he was offered didn’t go down well with shareholders, and was amended following a public revolt — which suggests BG is willing to listen to its investors. This is one element to like. 

Under Mr Lund’s stewardship, the British gas producer will likely push for larger divestments and new partnerships. 

Keep An Eye On SABMiller At £32… 

SAB stock was up almost 6% to £33.7 on Thursday last week. If you’re worried about SAB’s pre-Christmas rally, you shouldn’t be. 

The problem with SAB is that its main strength in the past few years has turned into its chief weakness today: emerging market exposure. At £31-£32, however, SAB stock trades around fair value, based on fundamentals and trading multiples. 

SAB shares have become less attractive because growth prospects in less developed economies continue to disappoint investors.

Moreover, most of the value that has been created in 2014 goes down to takeover rumours rather than operational improvements and/or improvement in SAB’s end markets. From a level of £31 a share, and excluding major shocks in the stock market, SAB could easily deliver gains in the region of 10%-15% in 2015, excluding dividends.

I Do Not Dislike HSBC 

Lots has been said and written about HSBC over the years. Confidence in the bank has yet to be restored, and management can certainly do more to deliver value to shareholders. A progressive dividend policy is one element I like, and bigger divestment could help HSBC deliver meaningful capital gains in the next 18 months.

Its stock is rather cheap, but whether it deserves to belong to your portfolio… well, that depends on how quickly management will take action to reduce the bank’s asset base. Capital adequacy ratios are not worse than those of most rivals, and even if the bears suggest that a cash call should not be ruled out under a worst-case scenario — such an outcome may represent a good opportunity for investors to average down if weakness in the stock price persists over time. 

As we point out in our latest report, which is FREE for a limited amount of time, blue-chip names such as these three frequently have the greater resources to ride out tough economies and rough markets. To this category also belongs one defensive business, whose shares could easily deliver a 15% capital gain into 2015. That excludes dividend payments!

Fancy a smaller company, though?

We have also identified a leader in the public transport sector, whose shares have been under pressure in recent weeks following a profit warning -- but they may be cheap enough to deserve your attention. Mind you: a 20% upside could be on the cards.....

Alessandro Pasetti has no position in any shares mentioned. 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.