The FTSE 100 has rallied some 700 points (12%) since its midsummer low of close to 6,000.
Not all companies have joined in the great rally. As a contrarian investor, I’m always interested in stocks that are out of favour, because unloved shares have the potential to be some of the best long-term investments.
Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), Unilever (LSE: ULVR) (NYSE: UL.US) and Tullow Oil (LSE: TLW) have all lagged the market. Are they now good value?
Royal Dutch Shell
This oil supermajor’s shares, recently trading at 2,140p, are at the same level as five months ago, and 10% down on their 52-week high.
Shell reported weak third-quarter earnings last month. The market is also concerned about the company’s commitment to massive capital expenditure over the next few years. On the positive side, Shell is raising cash from the sale of poorer-performing assets, while capital investment is in higher-margin projects, five of which are scheduled to come on line during the next 18 months.
I believe the market is being overly gloomy in rating Shell on a single-digit price-to-earnings (P/E) ratio and dividend yield in excess of 5%.
Unilever
Unilever’s shares, recently changing hands at 2,468p, are 2% down over the period of the Footsie’s 12% rally, and 14% down on their 52-week high.
The consumer goods giant released a trading statement at the end of September, saying it had seen “weakening in the market growth of many emerging countries in quarter three and now expects underlying sales growth of 3 to 3.5% in the quarter”. On the positive side, the long-term story of rising affluence in emerging markets and growing demand for Unilever’s brands surely remains intact.
A company positioned as well as Unilever is within emerging markets — the contribution to group revenues of these economies is 57% and rising — deserves a premium rating. I’d say a 12-month forecast P/E of around 18 is probably fair, while a prospective dividend yield of 3.7% is a bit above the market average.
Tullow Oil
At a recent low of 901p, Tullow Oil’s shares are 12% down over the last five months and 35% down on their 52-week high. The decline has been fairly relentless since the shares made an all-time high of around £16 during early 2012.
The oil exploration and production sector as a whole has suffered from investors’ risk averseness since that date. Tullow, whose main activities are in Africa, has been one of the harder-hit companies. On the positive side, Tullow’s shares are now looking attractive relative to its assets: for example, Oriel Securities’ calculation of risked net asset value of 1,123p a share, puts the shares at a 20% discount.
Furthermore, bid rumours for Tullow regularly surface in a £15 to £20 range. A spike in the shares to £14 this time last year was on the back of gossip that a group led by Thailand’s PTT Exploration was looking at a possible break-up of Tullow at £20 a share.