When it comes to investing, there is no perfect stock. Sometimes, a company can have an extremely sound business model, wide economic moat and offer a bright long term future. But, if its shares already appear to price in its prospects, then it may be worth waiting until it offers a wider margin of safety (should that day come along).
One example of such a company is online fashion retailer, ASOS (LSE: ASC). It remains one of the biggest British success stories of the last couple of decades, with it evolving at a rapid rate from a small, niche service that featured cheaper and more readily available versions of clothing that had been worn by celebrities at various film premieres, award ceremonies and other events (hence the name As Seen On Screen (ASOS)). Today, it operates across the globe and, due to deep discounting, is beginning to gain a foothold in lucrative markets across Asia in particular. As such, it seems to be well-positioned to post excellent financial performance in the long run.
The problem, though, is that ASOS trades on a price to earnings (P/E) ratio of 84.7 and has a rather uncertain near-term outlook. Certainly, its sales growth has been very strong, but its profit has dropped in each of the last two years and is set to do the same in the current year. Furthermore, when it does begin to taper its discounting, there is no guarantee that sales will remain robust, which means that the investment in pricing may need to continue for a while longer than is currently being priced in.
Of course, ASOS has far more control over its future than oil producer, Gulf Keystone (LSE: GKP). It operates out of Iraq/Kurdistan and has been hit by a lower oil price and also a lack of payment from the Kurdistan Regional Government (KRG). And, with Gulf Keystone being a relatively small operator, these problems are putting huge pressure on its financial standing and have been major factors in its share price fall of 49% year-to-date.
Clearly, Gulf Keystone’s recent operational update provides hope for its investors. For example, it confirmed that it was producing more than 40m barrels of oil per day and that it has received a second payment from the recently signed domestic contract. However, with its shares trading on a price to book (P/B) ratio of 1.5, there appear to be better risk/reward opportunities available elsewhere within the oil sector.
Meanwhile, AFC Energy (LSE: AFC) appears to be on the cusp of a significant increase in demand for its products. In fact, the use of alkaline fuel cells is increasing at a rapid rate and, with countries in both the developed and the developing world focused on reducing harmful emissions in favour of cleaner energy, AFC Energy could have a very impressive long terms earnings growth profile.
In fact, AFC’s CEO Adam Bond is confident that the company can beat its goal of having 1 GW of fuel cell capacity installed (or under development) by 2020. This follows recent commercial announcements in Asia and the Middle East, with AFC receiving significant interest for further partnerships moving forward. And, with AFC recently moving into profitability, it appears to be a viable business that can deliver share price and earnings growth in the long run. Certainly, its shares may not repeat their 2015 gains of 385% in the next six months, but they still appear to be worth buying at the present time.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
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Peter Stephens owns shares of AFC Energy. The Motley Fool UK owns shares of ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.