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Why I Would Buy Ocado Group PLC And Rexam PLC But Sell Vedanta Resources plc

Today I am looking at the investment case for these rapid movers in Thursday business.

Ocado Group

Shares in online grocery play Ocado (LSE: OCDO) have enjoyed a stunning upturn during the past few months, gaining more than 50% in a little over three months. The market has paused for breath today and the retailer is currently trading 5.1% lower, although I expect this to be a temporary hiatus before the stock treks higher again.

Investor sentiment was further boosted this week by news that Ocado delivered the first profit in its decade-and-a-half history for the year ending November 2014, ringing in at £7.2m as sales leapt 20% to £948.9m. Like Waitrose and Marks & Spencer, the business has benefitted from flocks of affluent shoppers ditching mid-tier operators like Tesco in favour of the more expensive products of premium outlets.

Analysts expect the company to continue delivering stunning bottom line growth as the e-commerce phenomenon clicks through the gears, and have pencilled in growth of 185% and 45% for fiscal 2015 and 2016 correspondingly.

These numbers leave Ocado changing hands on, at face value at least, ultra-expensive P/E multiples of 114.7 times and 78.6 times prospective earnings for these years. Still, I expect profits to continue surging higher as investment in distribution hubs, expanding its fleet of vans, and continued expansion into overseas markets bolsters the bottom line, in turn justifying this enormous premium.

Rexam

Beverage can manufacturer Rexam (LSE: REX) is lighting up the FTSE indices today and was recently stomping 23% higher. The business has been boosted by news that it was in talks with US rival Ball Corporation over a potential takeover, a deal which would value the London company at some $4.3bn.

Against a backcloth of rising metal costs and foreign exchange headwinds, City analysts do not expect earnings to take off in the near-term at the firm and an anticipated 1% improvement for 2014 is expected to be followed with a 3% dip in the current year. But the long-term investment case remains strong, and improving drinks demand is predicted to herald a solid 6% rise in 2016.

Accordingly Rexam deals on appetising P/E multiples of 12.2 times for 2015 and 11.6 times for 2016, comfortably below the widely-regarded yardstick of 15 times which represents attractive value for money.

And the business is a particularly appealing selection for those seeking chunky dividends, with Rexam anticipated to keep the payment on hold this year at 17.8p per share before hiking it to 18.6p in 2016. As a consequence the company boasts market-topping yields of 4.2% and 4.4% for these years.

Vedanta Resources

Giant copper miner Vedanta (LSE: VED) has enjoyed a perky uptick in recent days, and the company was last trading 2.7% higher in Thursday trade. But in my opinion a poor supply/demand picture for the red metal makes the stock a perilous stock pick — just today ANZ slashed its 2015 average copper price forecast by almost a fifth, to just $5,850 per tonne.

The effect of persistent commodity price weakness has seen Vedanta punch significant earnings dips during the past three years, a trend which is expected to repeat itself in the year ending March 2015 and a 53% decline is currently pencilled in.

Bafflingly, though, the City expects the digger to defy the effects of a worsening price outlook and punch earnings improvements to the tune of 98% and 203% in fiscal 2016 and 2017 respectively.

While it is true that some project scalebacks, and prospect of fresh Chinese stimulus on metal demand could give Vedanta’s revenues outlook a boost, I believe that the patchy state of the global economy is likely to stymie hopes of any meaningful bottom-line bounceback, and that P/E multiples of 32.3 times and 13.7 times for this year and next do not fully reflect the poor state of the copper market.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Rexam. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.