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Buy, Sell Or Hold Diageo plc, Imagination Technologies Group plc And Severn Trent Plc?

The slowdown in China is a cause for concern for beverages company Diageo (LSE: DGE). That’s because it is becoming increasingly reliant on China and other emerging markets for future growth, with it investing heavily in such areas during recent years. And, with Chinese GDP growth coming under pressure, Diageo’s bottom line is expected to rise by just 1% in the current year following two years of negative growth.

Although this situation is disappointing, it also presents a buying opportunity for long term investors. That’s because Diageo’s share price has fallen by 4% since the start of 2014 and, with demand from China, India, South America and other parts of the emerging world set to rise dramatically in future years, the company’s capital growth prospects are very upbeat. For example, 326m new middle class are forecast to emerge in China’s urban areas over the next 15 years; many of whom will demand the premium alcoholic drinks which Diageo produces.

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Furthermore, there is also the potential for sector consolidation. The beverages sector is already highly concentrated but, with short term growth being rather lacking, M&A activity could continue into 2016 after the SABMiller/ABInBev merger and, with Diageo having a stable of top quality brands, it remains a possible bid target.

Meanwhile, water services company Severn Trent (LSE: SVT) still has capital growth potential even after its shares have soared by 37% in the last three years. That’s because the outlook for the global economy remains relatively uncertain and so investors may flock to perceived safer stocks, such as utility companies. In addition, interest rate rises are likely to be slower than feared earlier this year and so the profitability of highly indebted companies such as Severn Trent may not come under the severe pressure which was feared.

Moreover, Severn Trent remains a very enticing income stock. It may yield slightly less than the FTSE 100 at 3.6% (versus 3.8% for the wider index), but its track record of dividend growth indicates that its shareholder payouts will rise at a faster pace than those of the index. For example, Severn Trent’s dividends per share have risen by 4.4% during the last five years, which has easily beaten inflation.

Broker downgrades appear to be the reason for Imagination Technologies’ (LSE: IMG) 7% share price fall today. This means that it is now up just 4% in the last year, with investor sentiment being relatively weak as the challenging year which is set to be recorded puts a brake on capital gains.

In fact, Imagination Tech’s earnings are due to fall by 24% in the current year but, looking ahead to next year, growth of 49% is being pencilled in. This puts the company’s shares on a price to earnings growth (PEG) ratio of just 0.6, which indicates that they offer considerable upside. Certainly, guidance can change and Imagination Tech remains a relatively volatile stock in terms of its financial performance. However, it could prove to be a sound technology play; of which there are only a handful in the FTSE 350. Therefore, it could be argued that it has scarcity value.

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Peter Stephens owns shares of Severn Trent. The Motley Fool UK owns shares of Imagination Technologies. 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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