In the investment world, there is no such thing as a risk-free company. In other words, every company has its own weaknesses, challenges and problems that must be taken into account before buying a slice of it. However, if the potential rewards outweigh such risks, or if there is a sufficiently wide margin of safety, then it could be worth investing in that company for the long haul. Certainly, the short to medium term may be volatile, but in the long run such opportunities tend to come good.
For example, Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) is enduring a highly challenging period. The UK supermarket sector remains a tough place to do business even though the UK economy is moving from strength to strength. And, looking ahead, it appears as though the price war and margin pressure that has been a feature of the recent past for the sector is unlikely to go away. This means that things could get worse before they get better for Tesco and its peers.
However, buying Tesco at the present time appears to be a sound move. That’s because its strategy of shrinking and focusing on its core operation and offering looks sound and, with it being at the beginning of a new era for the business, investors have the opportunity to buy in now at a great price. Furthermore, Tesco is expected to return to profit growth next year, with the company’s net profit set to rise by an impressive 32% in 2016. This could act as a positive catalyst on the company’s share price and push its price to earnings growth (PEG) ratio of 0.7 much higher.
Similarly, convenience store operator, McColl’s (LSE: MCSL), has also endured an unpopular period among investors. Its shares have sunk by 1% in the last year and have thus far failed to grab investors’ attention, with them trading on a price to earnings (P/E) ratio of just 10.3. And, with competition in the convenience store space set to intensify, the outlook for McColl’s appears to be challenging.
However, where McColl’s has huge appeal as an investment is in terms of its income prospects. For example, it currently yields a whopping 6.2% and, with dividends set to rise by 4% next year, it could pay out as much as 12.6% in dividends in the next two years alone. Furthermore, its dividends are well-covered by profit, with McColl’s having a dividend coverage ratio of 1.6, thereby providing the company with huge appeal to investors at a time when dividends remain of paramount importance.
Meanwhile, multi-channel electrical retailer, Darty (LSE: DRTY), continues to be unpopular among investors due to its exposure to Europe. Clearly, the European economy is experiencing vast challenges at the present time and, despite this, Darty is forecast to increase its earnings by 37% this year and by a further 19% next year. This should act as a positive catalyst on the company’s share price and, with Darty trading on a PEG ratio of just 0.6, there seems to be considerable scope for it to soar over the medium to long term.
