Monthly Stock Ideas

WH Group

Ticker: WHGLY, Buy below $15.

WH Group is the largest pork company in the world — with holdings in China, U.S. and Europe.

Why I Would Buy

1.       Cheap – WH’s stock is currently selling for < 10x forward earnings.

2.      Market Dominance – WH group has near global monopoly in pork production, processing and packaging; the rest of the market is highly fragmented and does not possess a comparable scale of operation.  

3.      Opportunistic Buy – The stock is buffeted by multiple factors: the trade war, and pork disease in China. Both these have already been priced in, a snap back is likely in the medium-to-long term.

4.       Low Payout Ratio – The dividend is a respectable 4%, with a payout ratio below 30%.

5.      Good Credit Ratings – Long term debt of the company is rated investment grade by all three rating agencies.

What Could Go Wrong

1.      Chinese Company – Potential for poor accounting and governance standards, government intervention, and questionable shareholder rights etc.

2.      Trade War – The company imports significant volume of Pork from the US and is directly in the crosshairs of the tariffs.

Disclosure: I am long WHGLY, please read additional disclosures here before taking any action based on this post.

Ticker: BNS, Buy below $60.

Bank of Nova Scotia is a major Canadian multinational bank.

Why I Would Buy

1. Cheap – BNS is currently selling for 11x trailing earnings and 10x forward earnings.
2. Dividend – Pays a 4+% dividend, while maintaining a payout ratio below 50%.
3. Return on Equity – RoE has been consistently at high teens for the past decade.
4. High Credit Ratings – Strong investment grade credit ratings on long term debt (A+ by S&P). I like strong long term debt ratings, as it is an indicator of the longevity and sustainability of earnings.
5. Geographically Diversified – in addition to Canada, the bank has significant revenue streams emanating from Caribbean and Latin American countries.

What Could Go Wrong

1. Recent Stock Issuance – BNS issued a large amount of stock recently to fund an acquisition, it may or not be accretive.
2. Trade War – Looming trade war could hurt emerging markets that BNS is exposed to.
3. Relative Valuation – Not particularly cheap when compared to other large banks e.g. JPM.

Ticker: WPP, Buy below $90.

WPP is a multinational advertising and public relations company based out of London.

Why I Would Buy

1. Cheap – WPP is currently selling for < 10x earnings.
2. Dividend – Pays close to 5%, while maintaining a payout ratio hovering around 40%.
3. Return on Equity – RoE has been above 10% for past decade, and above 15% for past 3 years.
4. Beaten Down – Beaten down due to uncertainties surrounding the departure of the founder-CEO, and also due to several major accounts coming up for renewal this year.
5. Globally Diversified – has significant revenue streams emanating from every major and developing economy around the world.

What Could Go Wrong

1. Account Renewals – Several large global accounts are up for renewal this year, just lost one of these (HSBC). If several others are lost, will hurt revenues grievously.
2. Debt – Several large recent acquisitions were financed via debt, if revenues taper due to any reason; it could snowball into a major problem.
3. High Beta – Advertising and media spend are strongly correlated to global economy, and is first spending to be cut in a downturn.

Disclosure: I am long WPP, please read additional disclosures here before taking any action based on this post.