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My £5,000 Xmas Portfolio: Tesco PLC, ARM Holdings Plc & Unilever plc

Is Tesco (LSE: TSCO) worth 100p or 300p a share? Well, I am happy to give new management the benefit of the doubt.

So, I’d add the stock at 160p/185p to my virtual portfolio — let’s say I am investing £1,000.

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Some £2,000 will be invested in ARM (LSE: ARM), whose stock trades around 990p but is worth more than 1,100p, in my view. Finally, I’d be happy to allocate £2,000 to Unilever (LSE: ULVR) at about 2,600p a share. 

Let me explain my choices.

Tesco: A Restructuring Play

Tesco is a hard nut to crack.

Based on the fair value of its assets, a price target of 230p a share seems appropriate, but then profitability is plummeting and the competitive landscape is incredibly challenging. So, one may easily argue that in the food retail sector, the shares of Morrisons could offer more upside, for instance, while the shares of Tesco will struggle to trade much higher than 160p. 

While it’s true that it will take time for Tesco to turn its fortunes around, its debt profile is reassuring, as I recently argued, and although cash flow must be carefully managed, Tesco could end up being a successful restructuring play, in my view. Depressed trading multiples provide little help when it comes to assess the investment case, whose attractiveness hinges on asset disposals in 2015. 

I’d gladly take some risk on this household name. 

ARM: A Growth Story

ARM is one of my favorite picks.

Based on growth prospects and cash flows, its shares could easily surge to 1,100p in 2015, for an implied upside of more than 10%.

ARM’s yield is rather low, but that’s the price to pay for growth in a sector that promises huge capital gains over the medium term.

If market consensus estimates are accurate, and there are reasons to believe they are, ARM will have grown revenue at a stunning four-year compound annual growth rate (CAGR) of 14% by the end of 2016, recording total sales of £1bn. 

ARM has no debts and boasts operating margin and net income margin in the region of 50% and above 30%, respectively. Share buybacks may help ARM deliver value — and a takeover by Intel remains a distinct possibility. Additional upside is likely to come from favorable currency swings in 2015 (a stronger $/£ exchange rate) and from the Chinese smartphone market, which needs ARM technology. 

Unilever: Capital Gains and Yield

Unilever stock has proved resilient in 2014 (+8%), but I reckon more upside could come from extraordinary corporate activity such as targeted acquisitions in the personal care space, and disposals in its food division, in particular. That’s in Unilever’s DNA, so there’s plenty of scope for shareholder-friendly activity financed by proceeds from divestments.

Revenue may peak to the end of 2016, and if so, Unilever will be able to generate record adjusted operating cash flow of almost £7.8bn in the next couple of years. Based on fundamentals and trading multiples, the shares could rise by at least 10% in 2015: they currently trade in line with the average price target from brokers, but could easily surprise investors.

Its projected yield above 3.4% is another appealing feature. 

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

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