The Motley Fool

Should you follow this billionaire into these two stocks?

Crispin Odey is probably one of the UK’s most vocal financial figureheads. The hedge fund manager made a name for himself in the run-up to the financial crisis when he became the first high-profile manager to short UK banks ahead of the 2008 banking sector meltdown. The profits from this financial crisis trade turned Odey into a billionaire and elevated him to superstar status in the hedge fund world.

Today, Odey’s outlook for the financial markets is probably even more depressing than it was nearly a decade ago. Last year, he proclaimed that UK stocks could fall as much as 80% if the Bank of England stopped printing money to prop up the markets. While he’s not been proven right just yet, Odey remains adamant that it’s only a matter of time before a financial crisis-style environment returns and he has positioned his portfolio accordingly. 

However, even though Odey is almost entirely negative on the market, he’s bullish on two stocks in particular.

Two diamonds in the rough 

Sky (LSE: SKY) and Pendragon (LSE: PDG) are the two companies Odey likes despite hating the rest of the market. Both of these businesses have their attractive qualities. Sky, for example, is the UK’s largest pay-TV broadcaster and is rapidly becoming the most significant player in the European pay-TV market. Meanwhile, Pendragon is one of the UK’s biggest car dealers, and despite improving profits, revenue and a stronger balance sheet than ever before, the company trades at an extremely low valuation.

A valuation worth buying

Odey has traded in out of Pendragon over the years, so he knows the business relatively well. Since Brexit, the stock has slumped from a high around 50p per share to a low of 31p even though the company has continued to report strong sales growth. 

For the third quarter, the group reported underlying profit growth of 5.7% year-on-year. For the full year, analysts are expecting earnings per share growth of 5% and based on this forecast the shares are trading at a forward P/E of 8.8.

Considering Pendragon’s steady growth and low valuation, it’s clear why Odey has made use of recent declines to increase his stake in the company from 204m to 229.4m shares.

Fox buyout 

Sky is another of Odey’s favourites and while he may have initially acquired the company for its defensive nature and high returns on capital, the group is now in a bid situation. 

Rupert Murdoch’s Fox is offering to buy the share of Sky it doesn’t already own and is offering shareholders £10.75 for their stake. As of yet, it’s not clear if the deal will go ahead as there are political and regulatory hurdles to clear. 

Nonetheless, while shareholders wait for the outcome, they can pocket Sky’s 3.4% dividend yield and a potential capital gain of 7.5% is on offer if the company gets the green light. If Fox’s offer is blocked, Sky remains an attractive long-term buy. City analysts have pencilled-in earnings per share growth of 18% for next year.

Make money, not mistakes

A recent study conducted by financial research firm DALBAR found that the average investor realised an annual return of only 3.7% a year over the past three decades, underperforming the wider market by around 5.3% annually thanks to poor investment decisions. 

To help you streamline your investment process, realise and understand the most common investor mis-steps, the Motley Fool has put together this new free report entitled The Worst Mistakes Investors Make.

The report is a collection of Foolish wisdom, which should help you avoid needlessly losing too many more profits. Click here to download your copy today.

Rupert Hargreaves owns shares of Sky and Pendragon. The Motley Fool UK has recommended Pendragon. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.