When it comes to the stock market, there is no such thing as a risk free investment. Even the supposedly most stable of companies and sectors post losses at some point over the long term.
Take, for example, the grocery industry. It was viewed a handful of years ago as a relatively defensive sector which offered upbeat growth rates. That’s because demand for food was likely to remain fairly stable (since we all need it) and the move to online and convenience stores was likely to provide growth opportunities.
The reality, though, has been rather different and supermarkets such as Tesco (LSE: TSCO) have seen their share prices slump by as much as 56% in the last five years. And, even though Tesco has a new management team, a refreshed strategy and the market is looking forward to improved trading conditions as the UK economy continues to gather pace, the company’s shares are flat year-to-date.
Tesco, though, has considerable growth potential. It is likely to generate efficiencies as it focuses increasingly on its core activities, while the pace of growth of no-frills discount stores such as Aldi and Lidl is likely to moderate somewhat as they become more mature and find growth opportunities more difficult to locate. As such, Tesco’s share price could easily move 20% higher – especially if it is able to offer relatively stable performance versus poor previous year comparators. In addition, it trades on a price to earnings growth (PEG) ratio of just 0.3, which indicates vast upside potential.
Similarly, Imperial Tobacco (LSE: IMT) has very bright capital gain prospects despite having risen by 34% in the last year. That’s because it offers a potent mixture of income and growth potential, as well as a relatively high amount of stability. For example, Imperial Tobacco yields 4.5% despite being forecast to pay out just 66% of profit as a dividend. This indicates that further rises in shareholder payouts are on the cards.
Furthermore, Imperial Tobacco has growth potential through the e-cigarette space, in which it has exposure via the Blu, Jai and Puritane brands. And, while only a small minority of smokers currently use e-cigarettes, it is a growing market. For example, the number of e-cigarette smokers in the UK trebled between 2012 and 2014 and, while the volume of cigarettes sold worldwide continues to fall, Imperial Tobacco is on-track to continue to grow earnings in the high single-digits over the medium to long term. With its shares having a PEG ratio of 1.2, 20%+ upside potential remains on offer.
Meanwhile, today’s profit warning from Amino Technologies (LSE: AMO) has caused its share price to sink by around 27%. That’s because the in-home digital entertainment solutions provider now expects to report a second-half shortfall in revenue versus expectations, which means that pretax profit is likely to be below market forecasts.
The company has identified that its sales execution efforts have been unsatisfactory and, as such, it has implemented targeted actions across its business. And, with the revenue and cost synergies associated with its recent M&A activity being ahead of schedule, Amino Technologies’ performance over the medium term could realistically pick up. Therefore, while in the short run its shares may come under further pressure, its 4.8% yield has appeal and could prove to be the catalyst to push its shares 20% higher in 2016 and beyond.