Today’s trading statement from Argos and Homebase owner, Home Retail (LSE: HOME), is perhaps somewhat disappointing. After all, the company has reported a fall in sales for both of its divisions, with Argos posting a decline in like-for-like sales in the second quarter of the year of 2.8%, while for Homebase total sales fell by 2.8%.
However, in the case of Homebase, this was largely as a result of a store closure programme whereby eight stores were closed in the quarter, leaving 271 still in existence. This strategy appears to be a sound one, with there being little value for investors in continuing to operate unprofitable stores. And, excluding the impact of the store closures, the remaining stores delivered like-for-like sales growth of 5.9%, which indicates that Home Retail’s turnaround plan is yielding positive results.
Similarly, Argos’s slightly disappointing quarter is relatively unimportant, since the Christmas trading period remains the deciding factor in whether a financial year is successful or not. On this front, the company has stated that it is well prepared, although it believes that the outcome is somewhat uncertain. Still, Argos appears to be performing relatively well and, with this Christmas set to be the first for a number of years where disposable incomes are higher in real terms than they were in the previous year, companies such as Home Retail could gain a real boost from increased consumer spending.
In fact, with Home Retail set to post a rise in earnings of 7% next year and its shares trading on a price to earnings (P/E) ratio of just 12, it seems likely that it will beat the wider index over the medium to long term.
Of course, it is not the only stock that looks set to outperform the FTSE 100. Telit Communications (LSE: TCM), for example, has enjoyed a fabulous 2015, with its share price having risen by 42%, compared with a 5% fall for the FTSE 100. Looking ahead, more outperformance is on the cards for the global enabler of machine-to-machine communications. That’s because it’s expected to deliver a rise in net profit of 15% this year, followed by further growth of 49% next year. And, while at least some of this growth has already been factored in by the market via a higher share price, Telit still trades on a price to earnings growth (PEG) ratio of just 0.3, which indicates that it could continue to seriously outperform the FTSE 100.
Meanwhile, BP (LSE: BP) may overcome the effects of a lower oil price far quicker than the market is currently anticipating. That’s because it has a very strong and diversified asset base which provides relative certainty during a volatile period, but also because market sentiment has the potential to improve following a number of challenging years for the business.
For example, it appears as though market sentiment has never fully picked up following the Deepwater Horizon oil spill in 2010 and, once compensation payments have ceased, it seems likely that the market will move on and cease applying a discount to the company’s shares. Similarly, the fear created among investors by tension between Russia and the West may have been somewhat overdone, since the relationship has perhaps not deteriorated to the extent that many investors had predicted. As such, BP could see its valuation upgraded over the medium to long term, with there being considerable scope for this to happen as a result of it trading on a PEG ratio of just 0.6.
