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Why I Prefer FTSE 250 Gems Betfair Group Ltd & RPC Group plc To FTSE 100 Giants Diageo PLC & Banco Santander SA

On the surface, Betfair (LSE: BET) and RPC Group (LSE: RPC) have nothing in common. But Betfair has delivered a very strong performance in recent weeks (+34% year to date), while RPC Group has fared well since the end of November (+12%), and is very likely to test its record highs very soon.

You may be tempted to cash in now, of course. If so, think twice before investing in Santander (LSE: BNC), whose shares trade in negative territory this year (-8%). Elsewhere, Diageo (LSE: DGE) (+5% year to date) remains a solid yield play, although its shares may struggle to rally for some time. 

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Betfair 

Betfair is proving to be more resilient than I thought. Management is doing something right with regards to its strategy, as I recently argued, and it seems like a more solid investment than Paddy Power, whose shares have also appreciated fast in recent times but are less likely to keep up with a stellar performance to the end of the year, in my view. Elsewhere, Ladbrokes and other players in the sector are less appealing due to the risk they carry. Betfair is not very cheap, based on its relative valuation, but its strong balance sheet and hefty operating margins are elements to like. Personally, I’d retain exposure to the stock as part of a diversified portfolio. 

RPC Group

Following its acquisition of Iceland’s Promens Group, RPC Group will likely continue to bank on cost synergies in the next few quarters, and it may find it easier to surprise investors and analysts. This plastic packaging supplier has delivered plenty of growth for many years, and it looks likely continue to do so into 2016. It doesn’t seem like its shares are particularly expensive, given that they trade at a price-to-earnings ratio of 19x and 14x for 2015 and 2016, respectively. Cash flow multiples also point to possible upside. RPC’s forward yield is close to 3%, and its balance sheet is efficient, with net leverage at around 2x. Shareholder-friendly activity is a possibility, and supports the investment case at a time when the shares trade some 20% below the average price target from brokers. 

Banco Santander & Diageo

Santander is a restructuring play that will take time to deliver value, in my view. The bank slashed the dividend by two-thirds in early January, when it also announced a €7.5bn reparatory rights issue. Based on most trading metrics the shares are still expensive, and I think analysts are way too bullish with regard to net income growth in the next three years. 

Moreover, there may be other problems around the corner: the quantitative results from the Dodd-Frank stress tests — one component of the Federal Reserve’s analysis during the Comprehensive Capital Analysis and Review (CCAR) — will be released on 11 March. According to The Wall Street Journal, the US subsidiaries of Deutsche Bank and Banco Santander may fail over shortcomings in how potential losses and risks are measured. We’ll soon find out how this one goes…

Finally, Diageo. 

Its main attraction is a dividend yield at about 3%, and that says it all really. The stock has failed to deliver capital gains for a couple of years now: it remains a mildly risky bet on the recovery in emerging markets. Based on trading multiples, the shares are a bit expensive, although Diageo’s fundamentals are strong. The problem — as with many other competitors in the booze industry — is that growth is hard to achieve, and declining returns on capital are very possible if growth prospects remain muted. 

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended RPC Group. 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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