2 hot stocks to watch this week

Good news for Xero shareholders, while Seven Group rolls the dice for earnings growth.

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Accounting software stock XERO FPO NZ (ASX: XRO) came to the market’s attention after its stellar run from $8.89 to a current price more than $37 during the past 52-weeks. A new strategic alliance with accounting firm KPMG provides an exciting opportunity for the company, while the recent share price drop provides buyers with a different sort of opportunity.

Seven Group Holdings Ltd (ASX: SVW) has announced its intention to swallow embattled oil explorer Nexus Energy Limited (ASX: NXS) in what looks set to involve huge cash outlays over the medium term.

Xero

One of the hottest tech stocks in recent times, Xero has formed an alliance with one of the ‘Big Four’ accounting firms in KPMG, in the United Kingdom. KPMG is set to offer online accounting services to small and medium-sized enterprise owners, using Xero as its ‘technology platform provider’. It’s another small step towards Xero’s bottom line fulfilling the promise of its astronomical share price growth.

I’m not brave enough to hazard a guess as to Xero’s intrinsic value or potential, though the company is moving in the right direction and the fact that KPMG describes the technology as ‘transforming the way we do business’ is encouraging. In my opinion, Xero is still a highly speculative purchase, though the share price is down over $5 from its recent highs for those who are so inclined.

Seven Group Holdings

Seven Group today signed a Merger Implementation Agreement with embattled oil and gas producer Nexus Energy to acquire the company at the price of 0.02 cents per share, significantly lower than its last-traded price of $0.059 back in February.

It’s an interesting purchase for Seven Group to say the least, requiring a $40 million cash advance to Nexus and an estimated $400 million investment over the medium term. Seven Group shares have risen marginally in line with the ASX, though I would caution investors about getting too excited before the full details of the proposal are unveiled in May. It could be a sound strategy to boost future earnings because oil and gas is always valuable (assuming the Nexus deal bears fruit), and the company may even be able to attain synergies from its stakes in WesTrac and Coates Hire. Analysis at Morningstar indicates the business is presently undervalued, which could provide an opportunity for the long-term buyer. Before doing that however, investors would do well to read Motley Fool contributor Mike King’s opinion on Seven’s diversification (he calls it ‘diworsification’) here.

Foolish takeaway

Xero continues to head in the right direction with its cloud accounting software and its latest announcement is a big positive. The alliance with KPMG will spread Xero’s software further, as well as allowing this relatively unknown company to absorb some of the corporate shine associated with KPMG, a renowned accounting firm.

As to Seven Group, it’s anyone’s guess how its newest acquisition will pan out. Watch for ‘changes in substantial holdings’ notices to see if big players like the banks begin to sell or buy; this should give you a firm idea as to what conservative money thinks of the purchase.

Motley Fool contributor Sean O’Neill owns shares in Xero Limited.

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