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Why I think this unloved FTSE 100 stock with a 7% yield could make you richer

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WPP (LSE: WPP) has to be one of the most hated stocks in the FTSE 100 right now. The company has come under fire from City analysts who believe that it is struggling to compete in the new world of online marketing, where Facebook and Google dominate the industry.

Indeed, analysts believe WPP’s inability to compete with these giants will result in a 14% decline in earnings per share (EPS) over the next two years to 108p, from the 2017 high water mark of 126p per share.

Considering all of the above, it is no surprise that investors have turned their backs on the company over the past 12 months. Since the beginning of January 2017, shares in WPP have lost around a third of their value, that’s including dividends.

However, despite this poor performance, I think the company could be a great addition to your portfolio in 2019. 

The worst case 

Looking at the shares right now, it appears that there’s already plenty of bad news baked into the price.

At the time of writing, shares in this advertising and marketing conglomerate are changing hands for just 7.9 times forward earnings. Even though EPS are set to decline by 14% over the next two years, this multiple undervalues the company in my opinion. 

Personally, I don’t think the group’s fortunes will improve drastically any time soon, but now that management is taking action to restructure the business for the 21st century, I think it could only be a matter of time before earnings level out.

And if the company does prove to the market that a recovery is under way, I think the shares could rise substantially from current levels. 

Shares in WPP have historically traded at a mid-teens multiple, a return to this level could see them trading higher by around 50%. In the meantime, the stock supports a dividend yield of 7%.

Double your money 

Another advertising business that seems severely undervalued is Taptica International (LSE: TAP).

Unlike its larger peer, it is still growing. The City is forecasting EPS growth of 98% for fiscal 2018 and 5.1% for 2019. But despite this growth, the shares are dealing at a forward P/E of just 4.2.

To try and reassure the market about the group’s prospects, management recently initiated a share buyback. The company is currently in the process of spending $10m of its $42m cash pile to repurchase shares. With a market capitalisation of £108m at the time of writing, a $10m buyback implies Taptica is going to reduce the total number of outstanding shares by 7.4%, a sizeable reduction.

I think it is a desirable investment for 2019. Usually, companies growing EPS at a double-digit annual rate would command a P/E multiple of 12 or more. If shares in Taptica traded up to this level, I calculate the stock could be worth 460p, a gain of 178% from current levels. At the same time, the dividend yield is 3.3%, which in my opinion only adds to the investment case. 

In the worst case scenario, as with any investment, investors could suffer a 100% loss. However, with a possible gain of 178% or more on offer when we include dividends, I think the risk-reward ratio here is desirable.

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Rupert Hargreaves owns no share mentioned. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares) and Facebook. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.