Shares in British American Tobacco (LSE: BATS) have beaten the FTSE 100 by 9% since the turn of the year and further outperformance is on the cards. That’s partly because the outlook for the wider market remains highly uncertain and there’s a good chance that investors will continue to favour defensive companies such as British American Tobacco.
Of course, British American Tobacco benefits from stable demand for its products. However, it also offers significant growth potential from the development of e-cigarettes, which continue to prove increasingly popular. Alongside improvements in pricing, this should help to offset the volume declines that are taking place across the tobacco industry and boost the company’s bottom line through earnings growth of 9% this year and 8% next year.
Although British American Tobacco trades at a premium to the wider index, with its shares having a price-to-earnings (P/E) ratio of 17.7 versus around 13 for the FTSE 100, they offer tremendous upward rerating potential. That’s because they offer a mix of stability and growth prospects, which should allow the company to beat the FTSE 100 over the long run in any market conditions.
Wait and see
Also outperforming the wider index year-to-date is Rolls-Royce (LSE: RR). Its shares are up by 19% versus a 2% decline for the wider index and while the company’s long-term prospects may be bright, its near-term performance could disappoint. That’s because Rolls-Royce is forecast to record a fall in earnings of 56% in the current year and this has the potential to hurt investor sentiment in the coming months.
While Rolls-Royce is likely to turn its performance around at least partly because of the capabilities of its new management team, it could prove to be a slower than expected process. After all, its bottom line is coming under severe pressure and even though earnings are expected to rise by 31% next year, it may be prudent to await evidence of the delivery of improved financial performance before buying a slice of it. That’s especially the case since it trades on a P/E ratio of 26.7 at the present time.
Bid target?
Meanwhile, online advertising specialist Blinkx (LSE: BLNX) has also outperformed the wider market in 2016, with its shares rising by an impressive 23%. The main reason for this was a better than expected set of third quarter results, with Blinkx making encouraging progress on its cost reduction measures as well as delivering improved performance in its core product lines.
Looking ahead, Blinkx could continue to beat the FTSE 100 if it’s able to continue to deliver on its strategy. The prospects for this appear to be reasonable and with Blinkx rumoured to be a potential bid target, this could also help to support its share price moving forward. However, with the company expected to remain in a lossmaking position in each of the next two years, there may be better options available elsewhere – especially with the stock market trading at such an appealing level.
