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These 2016 ‘dogs’ are set to become 2017’s ‘darlings’

Image: Persimmon. Fair use

For many UK-focused companies, 2016 has been a tough year. The EU referendum has caused uncertainty to build, which has impacted negatively on their share prices. While this could continue in the short run, a number of companies now trade on low valuations with wide margins of safety. Therefore, their performances in 2017 could be significantly better simply as a result of their upward re-rating potential.

Housing woes

The housing market could prove to be a sound place to invest for the long term. There’s a fundamental imbalance between demand and supply which is unlikely to narrow in the coming years. In fact, if population growth continues as is expected, the situation could get worse because there aren’t enough houses being built.

In such a situation, housebuilder Persimmon (LSE: PSN) has considerable appeal. Its shares have fallen by 17% since the start of the year as fears surrounding the prospects for the sector have intensified. In the short run, there’s a good chance that house prices will fall and this could affect the company’s performance. As such, its shares are likely to remain volatile.

However, with Persimmon trading on a price-to-earnings (P/E) ratio of 8.7, it offers a wide margin of safety. Therefore, it appears as though the market has priced-in a difficult period for the company. If this fails to materialise in 2017 then Persimmon could soar. Even if it does, the company’s yield of 6.5% is covered 1.8 times by profit and is among the highest sustainable yields in the FTSE 350. With inflation marching upwards, Persimmon could become increasingly popular and a top performer in 2017.

A dominant player

The quad play space (mobile, broadband, pay-TV and landline services from one provider) is becoming increasingly competitive. A whole host of companies in the media and telecoms space have transitioned into new services to generate cross-selling opportunities. However, BT (LSE: BT.A) is in a strong position to perform well even in this tough operating environment since it has been able to add a relatively large number of customers in a short space of time.

Looking ahead, this should generate high levels of cross-selling and with BT now being the dominant mobile player thanks to its acquisition of EE, it may be undeserving of its current valuation. The company’s share price has fallen by 24% this year and it now has a P/E ratio of just 11.7. And with its earnings due to rise by 6% next year, it continues to perform in line with the wider market.

Furthermore, BT yields 4.3% from a dividend which is covered twice by profit. This makes it a strong income stock for the long term, which could increase its appeal at a time when inflation is likely to become a more pressing concern for investors.

But will this stock outperform Persimmon and BT next year?

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.